In the United States, penny stocks are common shares of small public companies that trade at less than $1.00.[1] In some countries, similar shares of stock are known as cent stocks.
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Since many sub $1.00 stocks are thinly traded, and especially those that trade for fractions of one cent, they are targets for price manipulation.[2] For example, an individual or organization buys up hundreds of thousands, or even millions of shares, then uses web sites, press releases, and e-mail blasts to drive interest to the company. Very often, faulty or misleading information is provided, resulting in investors buying shares in the underlying company. The increased demand pushes the price up, while the original individual or organization doing the "pumping" sells their holdings.[3] The expanding use of the Internet has made penny stock scams easier to perpetuate.[4]
Penny stock companies often have low liquidity, making it difficult to sell shares. In extreme cases, investors may encounter difficulty liquidating their positions.
Another fraudulent scheme is the sale of chop stocks in which shares acquired below market under Regulation S are illegally sold to overseas or domestic retail investors.
Low liquidity also translates into easy manipulation of penny stocks due to most penny stocks being thinly traded. Often you will see advertisements or 'promotions' for "hot stocks", these penny stocks will often post gains during the promotion. This leads many investors to believe the positive statements in the promotion advertisements to be true and verified because the share price is appreciating.
This is often referred to using the term "pump and dump". A pump and dump is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements.
A recent pump-and-dump example, that has hit headlines and has been labeled as the biggest stock promotion of all time, is LEXG. LEXG was a paid promotion done on a very large scale, the market cap reached over $350 million at one point while the revenues for the company, posted from months earlier, were zero.[5][6]
In the United Kingdom, stocks priced under £1 are called penny shares.
In Spain, Penny Stocks are the shares that cost cents. Usually they are called Chicharros.