Penny Stock

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What it is:
Penny stocks are small-cap equity shares that trade in the over-the-counter market for prices
between several cents and ten dollars.

How it works/Example:
Penny stocks are usually issued by small or micro-cap companies to raise capital. The term
"penny" is used to denote the low prices of such stocks, as well as their low market
capitalizations. There are various viewpoints about what price level qualifies a stock as a
penny stock. However, the accepted range is between several cents to ten dollars.
The low price of penny stocks, as well as the volatility of their price movements, reflects their
high level of associated risk. Such stocks are not traded in mainstream equities markets and
must be purchased and sold in a special market called the over-the-counter (or OTC) market.
Often times, investors purchase penny stocks as speculative instruments, hoping to profit
from short-term price movements.

Why it Matters:
The volatility that often surrounds small-cap stocks makes them an attractive avenue for
some speculative investors. The extremely low prices of penny stocks make it relatively easy
for small individual investors to purchase large quantities of shares, while the high volatility
of these stocks may present an opportunity for quick profits on rapid price movements. Penny
stocks are generally considered to be a highly speculative form of investment and suitable
only for investors with a high appetite for risk.
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