what is a penny stock 
a penny stock typically refers to the stock of a small company that trades for less than 5 per share though some penny stocks trade on large exchanges such as the new york stock exchange nyse most trade via over the counter otc transactions through the electronic otc bulletin board otcbb or through the privately owned otc markets group there is no trading floor for otc transactions quotations are also all done electronically investopedia ryan oakleyunderstanding penny stocksin the past penny stocks were considered any stocks that traded for less than one dollar per share the u s securities and exchange commission sec has modified the definition to include all shares trading below five dollars the sec is an independent federal government agency responsible for protecting investors by maintaining the proper and orderly functioning of the securities markets penny stocks are usually associated with small companies with a lack of liquidity meaning that there are few ready buyers in the marketplace as a result investors may find it difficult to sell stock since there may not be enough buyers because of the low liquidity investors might have difficulty finding a price that accurately reflects the market due to their lack of liquidity wide bid ask spreads or price quotes and small company sizes penny stocks are generally considered highly speculative in other words investors could lose a sizable amount or all of their investment penny stock volatilitypenny stocks often represent growing companies with limited cash and resources since these are primarily small companies penny stocks are most suitable for investors who have a high tolerance for risk typically penny stocks have a higher level of volatility resulting in a higher potential for reward and thus a higher level of inherent risk investors may lose their entire investment on a penny stock or more than their investment if they buy on margin which means the investor borrowed funds from a bank or broker to purchase the shares investors should consider the heightened risks associated with penny stocks for example an investor should have a stop loss order predetermined before entering a trade and know what price level to exit if the market moves against them stop loss orders set a price limit that once reached will trigger an automatic sale of the securities although penny stocks can have explosive gains it is essential to have realistic expectations and understand that penny stocks are high risk investments with low trading volumes advantages and disadvantages of penny stocksdue to their low volume penny stocks tend to be more volatile than established equities this means high opportunities for both gains and losses and investors should be careful to understand both the risks and benefits penny stocks do provide some small businesses with a way to access funding from the public these companies may use this platform as a starting block to move into a larger marketplace also since they sell at such low prices there is room for significant upside some companies such as amazon amzn originated as penny stocks but later grew into sizable blue chip companies a blue chip is a nationally recognized well established and financially sound company blue chips generally sell high quality widely accepted products and services blue chip companies typically have a history of weathering downturns and operate profitably in the face of adverse economic conditions which helps to contribute to their long record of stable and reliable growth however some factors exacerbate the risk associated with investing in or trading penny stocks these securities are usually riskier than more established companies 