What are penny stocks?

Answer 1

A Low-priced, Speculative SecurityThe definition of a penny stock varies depending on who you ask. Some consider any stock trading under $5 to be a penny stock while others consider any stock trading under a dollar to be a penny stock. These stocks are often traded off of the major exchanges and are bought and sold as Pink Sheets or off the Bulletin Boards. There are large risks associated with speculating on penny stocks. They can be easily manipulated by large investors like hedge funds. The bid ask spread can be large and serve as a significant barrier to making a profit. Also, the lack of liquidity can make it difficult to get in and out of your investment and cause quick price fluctuations.

One thing to think about is that very seldom if ever does a stock start off as a penny stock so the stock has already had some difficulties to get to where it is at now. Anyone investing in these stocks should consider it a speculative bet. Rewards could be significant but you could very well lose everything you invested.

Answer 2

A penny stock is a common stock that trades for less than $5 a share and are traded over the counter (which just means it's directly between 2 parties).

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 or an "over the counter".

Many new investors are lured to the appeal of a penny stock due to the low price and potential for rapid growth which may be as high as several hundred percent in a few days.