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Penny stock
Penny stocks are common shares of small public companies that trade for less than five dollars per share. The U.S. Securities and Exchange Commission (SEC) uses the term "penny stock" to refer to a security, a financial instrument which represents a given financial value, issued by small public companies that trade at less than $5 per share. The term "penny stock" refers to shares that, prior to the SEC's classification, traded for "pennies on the dollar". In 1934, when the United States government passed the Securities Exchange Act to regulate any and all transactions of securities between parties which are "not the original issuer", the SEC at the time disclosed that equity securities which trade for less than $5 per share could not be listed on any national stock exchange or index.
In countries other than the United States, where stock prices are denoted in local currencies, a US$5.00 value does not have any necessary implication. In China, for example, it is common for initial public offerings of large companies to have an offer price of 10-40 Rmb per share, the equivalent of US$1.50-5.50 per share. For example, Yonz Technology Co. Ltd. raised US$191 million by going public on the Shanghai Stock Exchange in June 2024 at an offer price of 23.35 Rmb per share, the equivalent of a little over US$3.00 per share.
Over-the-counter exchanges that list penny stocks include OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.) and formerly the OTC Bulletin Board (which was a facility of FINRA). Penny stocks can also trade on securities exchanges, including foreign securities exchanges. Penny stocks can include the securities of certain private companies with no active trading market. Nasdaq and the New York Stock Exchange now require that listed stocks maintain a minimum share price of $1.00 per share. Companies that see their stock price fall to below $1.00 per share frequently perform a reverse stock split in order to avoid delisting.
When considering penny stocks, investors and experts in the field recognize the low market price of shares and its correlation to low market capitalization. Market capitalization or "market cap" is the total dollar market value of all of a company’s outstanding securities.
Since penny stocks are inexpensive, investors often buy large quantities of shares without spending much money. This tendency makes the penny stock market volatile. Volatility is "a statistical measure of the dispersion of returns for a given security or market index". Typically, the higher the volatility, the greater the risk in investing in said securities. Conversely, the lower the volatility, the "safer" the investment is. Volatility can be also understood as the frequency of large changes in the value of a given security in either direction. This is directly correlated to the price action of a security which, when talking about penny stocks, can change more rapidly than that of a large-cap stock.
Prosecutors and the Federal Bureau of Investigation say that fraud is widespread in the penny stock market. Potential fraud that involves even what are considered very small or micro market cap companies can still involve losses of tens of millions of dollars.
The penny stock market has little liquidity for some stocks, especially those traded OTC, so holders of shares in penny stock companies often find it difficult to cash out of positions. However, academic research shows that for stocks listed on organized exchanges the risk created by small market cap size and lower liquidity results in higher expected returns due to the size and liquidity premiums.
In the United States, the SEC and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.
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Penny stock
Penny stocks are common shares of small public companies that trade for less than five dollars per share. The U.S. Securities and Exchange Commission (SEC) uses the term "penny stock" to refer to a security, a financial instrument which represents a given financial value, issued by small public companies that trade at less than $5 per share. The term "penny stock" refers to shares that, prior to the SEC's classification, traded for "pennies on the dollar". In 1934, when the United States government passed the Securities Exchange Act to regulate any and all transactions of securities between parties which are "not the original issuer", the SEC at the time disclosed that equity securities which trade for less than $5 per share could not be listed on any national stock exchange or index.
In countries other than the United States, where stock prices are denoted in local currencies, a US$5.00 value does not have any necessary implication. In China, for example, it is common for initial public offerings of large companies to have an offer price of 10-40 Rmb per share, the equivalent of US$1.50-5.50 per share. For example, Yonz Technology Co. Ltd. raised US$191 million by going public on the Shanghai Stock Exchange in June 2024 at an offer price of 23.35 Rmb per share, the equivalent of a little over US$3.00 per share.
Over-the-counter exchanges that list penny stocks include OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.) and formerly the OTC Bulletin Board (which was a facility of FINRA). Penny stocks can also trade on securities exchanges, including foreign securities exchanges. Penny stocks can include the securities of certain private companies with no active trading market. Nasdaq and the New York Stock Exchange now require that listed stocks maintain a minimum share price of $1.00 per share. Companies that see their stock price fall to below $1.00 per share frequently perform a reverse stock split in order to avoid delisting.
When considering penny stocks, investors and experts in the field recognize the low market price of shares and its correlation to low market capitalization. Market capitalization or "market cap" is the total dollar market value of all of a company’s outstanding securities.
Since penny stocks are inexpensive, investors often buy large quantities of shares without spending much money. This tendency makes the penny stock market volatile. Volatility is "a statistical measure of the dispersion of returns for a given security or market index". Typically, the higher the volatility, the greater the risk in investing in said securities. Conversely, the lower the volatility, the "safer" the investment is. Volatility can be also understood as the frequency of large changes in the value of a given security in either direction. This is directly correlated to the price action of a security which, when talking about penny stocks, can change more rapidly than that of a large-cap stock.
Prosecutors and the Federal Bureau of Investigation say that fraud is widespread in the penny stock market. Potential fraud that involves even what are considered very small or micro market cap companies can still involve losses of tens of millions of dollars.
The penny stock market has little liquidity for some stocks, especially those traded OTC, so holders of shares in penny stock companies often find it difficult to cash out of positions. However, academic research shows that for stocks listed on organized exchanges the risk created by small market cap size and lower liquidity results in higher expected returns due to the size and liquidity premiums.
In the United States, the SEC and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.