Penny stocks typically trade below $5, often on OTC venues like OTC Pink, and carry high volatility, low liquidity, and greater fraud risk. Investors should treat them as speculative, use limit orders, cap position sizes, and rely on independent research and filings when available.
What is a penny stock?
Regulators and brokers generally call a security a "penny stock" when it trades below $5 per share. Many of these issues trade on over-the-counter venues (OTC) such as OTC Pink, OTCQB, and OTCQX, though some low-priced shares can appear on the major exchanges too. Penny stocks are typically small-cap, thinly traded, and have limited public information.
Common characteristics
- Low share price (under $5 per SEC guidance)
- Low liquidity and wide bid-ask spreads
- Irregular, often large price swings
- Limited disclosure or fewer audited filings when trading OTC
- Higher vulnerability to market manipulation, including pump-and-dump schemes
How you view and buy penny stocks
Most retail investors view OTC listings through a broker that offers OTC trading. Brokers differ in the OTC access and trade execution they provide, so check fees and order types. Use limit orders rather than market orders to control entry and exit prices, and be mindful of execution risk when liquidity is low.
You can also check company filings when available. For companies listed on exchanges or that file with the SEC, look up their filings on EDGAR. OTC companies may file less consistently, so rely on multiple sources when researching.
Potential rewards and real risks
Penny stocks can rise quickly, which attracts traders seeking rapid gains. But gains are far from guaranteed. Low liquidity magnifies price moves, and the lack of transparent fundamentals makes valuation difficult. Fraud and manipulation remain significant risks in OTC markets. Because of these factors, penny stocks carry a high probability of substantial losses as well as gains.
Practical guidance
- Only use capital you can afford to lose. Treat penny-stock positions as speculative.
- Limit position sizes and never concentrate your portfolio on a single penny stock.
- Use limit orders and avoid margin on highly illiquid names.
- Diversify across legitimate asset classes and consider low-cost funds if you want exposure to small companies without single-stock risk.
- Verify any promotional claims and look for independent sources and audited financials where possible.
Bottom line
Penny stocks remain a higher-risk, higher-volatility corner of the markets. They can produce outsized moves, but they also expose investors to low liquidity, limited disclosure, and manipulation. If you choose to trade them, do so cautiously, with strict risk limits and careful research.