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What are Penny Stocks?

There are many definitions of penny stocks. The one given by the SEC is any stock priced at less than $5. Other definitions include stocks priced at less than a $1 and less than $2. Some traders associate penny stocks as any stock that is not traded on any of the major stock exchanges, for example AMEX and NYSE.

Whatever definition you use they are essentially stocks that are much cheaper to buy than average.

High risk

Penny stocks are usually highly volatile and risky. They are generally only suitable for traders with a very high appetite for risk. Spreads on penny stocks can also be very large, providing an extra hurdle for the trader to overcome.

Penny Stock Fraud

You may be aware, penny stocks are often considerably less liquid than more expensive stocks. This can make them relatively easy to manipulate. There are many fraudulent schemes aimed at effectively stealing your money. Popular ones include:

Pump and Dump

A pump and dump fraud is where an individual or a group of criminal speculators buy a particular stock so the price rises. They then release false information as to why the stock has risen. They try to spread their rumor as widely as they can so as many people as possible buy the stock. When the price has risen considerably after people believing the rumor and buying the stock. The criminals then sell the stock for a huge profit. All the other traders who bought the stock end up losing money when the price crashes back down. The later a trader bought the stock, the more they generally lose.

The opposite of this strategy is the poop and scoop. This is where criminal speculators spread negative rumors around, encouraging traders to sell their stock so the criminal speculators can then buy it a lower price and later make a profit when the price rises.

To learn more about penny stocks, check out the trading penny stock section of the site. If you are looking for a penny stock broker. Feel free to check out the penny stock broker section.