Legal Definitions - penny stock

A penny stock is a type of equity security that is not traded in established markets, represents no tangible assets, or has average revenues less than required for trading on an exchange. Typically, a penny stock is highly speculative and can be purchased for less than $5 a share.

For example, a startup company that has not yet established a track record of success may issue penny stocks to raise capital. Investors who purchase these stocks are taking a high-risk gamble that the company will become profitable in the future and the stock price will increase.

Another example is a company that has experienced financial difficulties and is on the verge of bankruptcy. The company may issue penny stocks as a last-ditch effort to raise funds and avoid going out of business. Investors who purchase these stocks are taking an even greater risk, as the company may ultimately fail and the stock may become worthless.

In both examples, the penny stock represents a high-risk investment with the potential for high rewards, but also the potential for significant losses.