You have probably heard a lot about penny stocks. I’m sure you have seen ads all over the Internet that advertise things like “Get rich with penny stocks!” or “Turn pennies into thousands!”.

Well unfortunately those ads aren’t very realistic.

I know, I know, it’s surprising to find something on the Internet that may not be true. Is it possible to make a lot of money with penny stocks? Sure. You can make money with anything if you are good at it or lucky, but it’s definitely not for everyone and it’s not really investing.

So what exactly is a penny stock?

There are Penny Stocks…

Penny stocks are basically any stock that trades for less than $5 per share. The $5 things is new, since a penny stock used to be any stock trading for less than $1 per share, but the definition was recently changed by the Securities and Exchange Commission (SEC) to include any stock under $5.

So contrary to popular belief, the value doesn’t actually have to be in the pennies to be considered a “penny stock”. I guess they figured dime stocks and quarter stocks sounded ridiculous and now it’s easier to say penny stocks as an all-inclusive term for these risky stocks.

…Then There are Sub-Penny Stocks

There is a stock even cheaper than a penny stock, known as a sub-penny stock. This is, as it sounds, any stock that trades for less than one penny per share. Some sub-penny stocks can go pretty low. It’s not uncommon for them to trade at .001 cents per share and even lower. Most of these sub-penny stocks (and many penny stocks) trade on the OTC (Over-the-Counter) markets and they are extremely speculative.

It is possible that they aren’t even a company. Some are just plain scams.

Why Not Dollar Stocks?

It may seem strange that stocks worth up to $5 can be called penny stocks, but there is a reason for this. These low valued stocks of $2 or $3 are perceived to be just as risky as the stocks that are worth less than $1; therefore, the name penny stock applies to all of these now. Basically, when you hear penny stock, most people think high-risk. So now the other high-risk stocks are included.

The Bottom Line

The chance for losing money with penny stocks is much higher than gaining money. With penny stocks, there are usually thousands of people buying and selling thousands of shares all the time, which makes for a very up and down stock price. It’s not uncommon for a penny stock to increase or decrease by 500% (or more) in one day, merely due to trading activity (and that is not the primary reason you want to see a stock price change).

If you want to get into penny stocks, you can buy some for a few bucks, just for fun, or you can find some of those Internet programs that promise to help you make money with penny stocks, but I wouldn’t recommend that. Just remember, it’s much more like gambling than investing.

Even if you do earn money, that doesn’t mean it was a wise decision. Happy investing!