Penny stock

Quick definition

Copy link to section
Updated: Jan 21, 2022

A penny stock is a stock of a typically small company that trades for less than $5 per share.

Key details

Copy link to section
  • Penny stocks are defined by the US Securities and Exchange Commission (SEC) as all company shares that trade below $5 each
  • A lack of liquidity is typical of small companies and this means that penny stocks are traded infrequently and have few ready buyers 
  • Penny stocks are highly speculative investments intended for investors with large risk appetites

What is a penny stock?

Copy link to section

A penny stock is any stock that sells for under $5 each. These are typically stocks in small companies that have low liquidity as they are in the growth stage seeking funds from the public on the stock market. As such, penny stocks trade infrequently and have a lack of ready buyers in the marketplace.

Only investors with high risk capacity should consider investing in penny stocks. Small companies suffer growth uncertainties and this makes penny stocks highly volatile, risky, and speculative investments. investors must do their own due diligence and invest with care as they risk losing their entire investment on a penny stock.

With high risk comes high reward and consequently, penny stocks can have explosive gains. You must always budget what you can afford to lose. It is imperative to set realistic expectations and understand that penny stocks are high-risk investments with low trading volume.

Where can I learn more?

Copy link to section

To find out more about penny stocks and other key financial concepts, check out our full course page about stocks. Our courses shall guide you through everything you need to know about stocks and investing

Sources & references
Risk disclaimer
Srijani Chatterjee
Financial Writer
Srijani is the quintessential Third Culture Kid having grown up in India, Singapore, Malaysia, The Netherlands, Scotland, and England. She still loves to travel and speaks... read more.