What it is:
How it works (Example):
Penny stocks are usually issued by small or micro-cap companies to raise capital. The term "penny" is used to denote the low prices of such stocks, as well as their low market capitalizations. There are various viewpoints about what price level qualifies a stock as a penny stock. However, the accepted range is between several cents to ten dollars.
The low price of penny stocks, as well as the volatility of their price movements, reflects their high level of associated risk. Such stocks are not traded in mainstream equities markets and must be purchased and sold in a special market called the over-the-counter (or OTC) market. Often times, investors purchase penny stocks as speculative instruments, hoping to profit from short-term price movements.
Why it Matters:
The volatility that often surrounds small-cap stocks makes them an attractive avenue for some speculative investors. The extremely low prices of penny stocks make it relatively easy for small individual investors to purchase large quantities of shares, while the high volatility of these stocks may present an opportunity for quick profits on rapid price movements. Penny stocks are generally considered to be a highly speculative form of investment and suitable only for investors with a high appetite for risk.