Financial Word of the Day: Penny Stock

Larry Jones
Aug 6
2 min read

Updated: Sep 25

Definition of Penny Stock

A penny stock is typically a share of a small public company that trades for less than $5 per share. These stocks are often traded over-the-counter (OTC) through platforms like the OTC Bulletin Board or Pink Sheets, rather than on major exchanges like the NYSE or Nasdaq. Penny stocks are known for their low price, low trading volume, and high risk—but also the potential for high reward.

Let’s Break This Down

Buying a penny stock is kind of like betting on the underdog in a sporting event. You're hoping this tiny company will one day become the next big thing. And yes, sometimes that happens. But more often than not, the underdog gets crushed, and your investment goes to zero.

Why? Because penny stocks usually belong to companies with unproven business models, limited financial history, or shaky fundamentals. Think startups without much traction, companies on the verge of bankruptcy, or businesses operating in industries where hype outweighs substance.

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Here’s an Example of a Penny Stock

Let’s say you stumble on a biotech company called “Miracle DNA Inc.” trading at $0.45 per share. They claim to be working on a revolutionary gene therapy, and you’re tempted to throw in $1,000 hoping the stock will hit $10. That’s over a 2,000% return!

But the fine print? They’ve got no FDA approval, zero revenue, and their last press release was two years ago. That’s the reality of many penny stocks—they sound exciting, but are often built more on dreams than data.

Use Penny Stock in a Sentence

“Jason invested in a penny stock he found on Reddit, but the company folded within six months. He learned the hard way that low price doesn’t always mean high value.”

Investor Insight

Penny stocks are often marketed aggressively through email blasts, social media, or shady “pump and dump” schemes. In these cases, someone hypes up the stock (pump), sells their shares once people buy in and drive the price up (dump), and leaves other investors holding the bag as the price crashes.

If you're going to dabble in penny stocks, treat it like going to the casino. Only risk money you can afford to lose, and don’t let hype cloud your judgment.

Bottom Line

Penny stocks can make headlines, but they rarely make millionaires. If you want to build lasting wealth, focus on quality businesses with real earnings, a strong track record, and a future worth betting on. Steady compounding always beats flashy speculation in the long run.