Penny Stock
So what exactly are penny stocks?
n the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative. However, the official SEC definition[1] of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or NASDAQ) or an "over the counter" listing service, such as the OTCBB or Pink Sheets.

The terms penny stocks, microcap stocks, small caps, and nano caps are also all sometimes used interchangeably, however per the SEC definition, penny stock status is determined by share price, not market capitalization or listing service. read more

Penny Stock
Are penny stocks a risky investment?
Many new investors are lured to the appeal of penny stocks due to the low price and potential for rapid growth which may be as high as several hundred dollars in a few days. Similarly, severe loss can occur and many penny stocks lose all of their value in the long term. Accordingly, the SEC warns that penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud. Since a penny stock has fewer shareholders, it is less 'liquid', meaning it will not trade as many shares per day as a larger company. Any sudden change in demand or supply of stock can lead to a lot of volatility in the stock price. This lack of liquidity can send a stock price soaring up quickly or crashing down quickly.

Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation by management, market makers, or third parties. A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day. This can also make the stocks extremely difficult to short. read more

Penny Stock
Why are there so many penny stock spam emails?
Promoters of penny stocks typically pitch these high-risk investments as if they were valuable real estate, like oceanfront property: With little money down, they say, you can make a quick and easy profit. But in reality, penny stocks are more like swampland. And now, thanks to spam, the muck is spreading at an alarming rate, and efforts to stop it have so far been as effective as ordering the tide not to come in.

You probably trashed an e-mail message in December that touted Goldmark Industries. A spam campaign predicted that investors would earn spectacular returns. One e-mail, which forecast the stock would gain 1,077%, said, "Watch GDKI (Goldmark's symbol) soar on Wednesday, Dec. 20!" read more

Penny Stock
What does Motley Fool say about penny stocks?
It's the potential of quick gains in "cheap" stocks that keeps investors coming back. We typed "penny stocks" into Google, and the search engine spit out "about 1,210,000" hits. We did the same for more time-tested terms such as "blue-chip stocks" and "dividend-paying stocks" and got just 266,000 and 173,000 hits, respectively.

Sure, we expected a discrepancy, but the size of the gap was startling. It became even more interesting when we broke down those hits with Google Trends. According to Trends, penny stocks are particularly alluring to investors in Orlando, Las Vegas, Tampa, and Calgary -- the locales where the term is most often searched. read more

Penny Stock
How does the SEC define a penny stock?
The term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies. While penny stocks generally trade over-the-counter, such as on the OTC Bulletin Board or in the Pink Sheets, they may also trade on securities exchanges, including foreign securities exchanges. In addition, penny stocks include the securities of certain private companies with no active trading market.

Before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document describing the risks of investing in penny stocks. The firm must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. read more