Legal Definitions - penny stock

A penny stock refers to the shares of a very small company that typically trade at a low price, often below $5 per share. These stocks are usually not listed on major stock exchanges like the New York Stock Exchange (NYSE) or Nasdaq. Instead, they are often traded "over-the-counter" (OTC) through a network of broker-dealers. Penny stocks are generally considered highly speculative and risky investments due to their low liquidity, limited public information about the company, and susceptibility to price manipulation.

Here are some examples to illustrate the concept of a penny stock:

• Example 1: Startup Seeking Early Capital
  "GreenTech Innovations" is a newly formed company developing a groundbreaking method for sustainable energy storage. To raise initial funds without the extensive regulatory requirements of a major stock exchange, they decide to offer shares to investors at $0.85 per share through an over-the-counter market. The company is very new, has no established revenue, and its technology is still in the early stages of development.

  How this illustrates the term: This scenario describes a penny stock because GreenTech Innovations is a small, unproven company whose shares are trading at a very low price (under $5) and are not listed on a major exchange. The investment is highly speculative, reflecting the typical characteristics of a penny stock.

• Example 2: Mining Company with Uncertain Prospects
  "Frontier Minerals Corp." is a small exploration company searching for rare earth elements in a remote region. Their stock trades at $2.10 per share on an OTC bulletin board. While there's potential for a significant discovery, the company's financial health is fragile, and public information about their drilling progress and reserves is limited and often difficult to verify.

  How this illustrates the term: Frontier Minerals Corp. exemplifies a penny stock due to its low share price, trading on an OTC market rather than a major exchange, and the inherent high risk and speculative nature associated with the company's uncertain prospects and limited public data. Investors are betting on a future discovery rather than proven profitability.

• Example 3: Biotechnology Firm with Unproven Drug
  "CureAll Biotech," a small pharmaceutical company, is in the early stages of developing an experimental drug for a rare genetic disorder. Their shares are trading at $4.25 each. The company has not yet generated any revenue from drug sales, and the success of their experimental drug is highly uncertain, pending years of clinical trials and regulatory approval.

  How this illustrates the term: This fits the definition of a penny stock because CureAll Biotech is a small company with shares trading below $5. The investment is highly speculative, relying entirely on the future success of an unproven product, and likely trades outside of major exchanges, making it a high-risk proposition for investors.