Glossary · Defined term
Penny stock
A penny stock is a low-priced share, usually under $5 and traded over the counter, known for thin volume and high risk.
Last updated Oct 2, 2026
What it means
A penny stock is a low-priced share, generally trading under $5, that usually trades over the counter rather than on a major exchange. The SEC's formal definition covers securities priced under $5 that are not listed on a national exchange. These are typically tiny companies with limited operating history and minimal analyst coverage.
Penny stocks are defined by their market structure as much as their price: thin trading volume, wide bid-ask spreads, and violent price swings on small dollar amounts of trading. That combination makes them a favorite vehicle for pump-and-dump schemes, where promoters hype a stock, sell into the buying frenzy, and leave late buyers with losses.
None of this means every low-priced stock is a scam, but the odds demand extreme caution. Legitimate small companies can trade at low prices, yet the lack of liquidity and oversight means even a legitimately run penny stock can be nearly impossible to exit at a fair price. Most long-term investors avoid the category entirely.
An example
For illustration, a stock priced at $0.40 jumps 50% to $0.60 on just 10,000 shares traded. The huge percentage move came from only a few thousand dollars changing hands, which shows how little trading it takes to whip a penny stock around.