As mentioned above, penny stocks are stocks that trade for $5 or less. This definition means there are many options for investors including dollar stocks, penny stocks, and stocks that sell for fractions of one penny.
One stereotype about penny stocks is that every company is a startup that is in a risky market sector. However, there are many established businesses trading on standard exchanges that trade for less than $5 per share. When these companies appear on major exchanges, they are viewed as carrying less risk because they have to meet regulatory requirements that keep their accounting transparent.
That being said, penny stocks are usually small-cap companies (i.e. those with a market capitalization of less than $2 billion) that are either new to the market or undervalued and not recognized by investors. There tend to be fewer shares of these stocks available, meaning there is usually a wider spread between bids and asking prices.
And because penny stocks are generally considered to be speculative investments, they carry a certain element of risk. But it’s this risk that provides the opportunity for investors to make significant gains.