Penny stocks are generally considered highly speculative and carry a high risk owing to their lack of liquidity and high bid-ask spreads. Beyond that, there is no set definition of what is considered to be a penny stock. For some, a penny stock is a stock that trades in pennies. Other investors think of penny stocks as any stock that trades for less than $5 per share. And yet others will consider penny stocks to be any stock, regardless of share price, that does not trade on a major market. However, some large companies will trade shares for less than $5 per share, and who by name would not make you consider their shares as a penny stock despite the low cost of those shares. Conversely, those who consider smaller companies that do not trade in a major market to be penny stocks, can have share prices that exceed $5 per share. Perhaps the most typical definition of a penny stock is a smaller company that, despite its small size, has highly illiquid and speculative shares. Penny stocks do not trade in major markets like the NYSE, rather they trade in Over-the-Counter through the Over-the-Counter Bulletin Board (OTCBB) and pink sheets.
Because penny stocks are generally companies that are still building themselves up as a business, investing in them can be risky. It is not an easy task to create a company and make it successful to the point that it can be listed in a stock exchange. Often times companies will fail, and when they do you will lose your investment. There is no statement that says a company must pay back the money you originally invested in them; they only have to pay you dividends. It can be likened to sales in which the sale is final and there are no returns. The only way to recover money invested in a company is to sell your shares off, even if you do not make your original investment back—recovering some money is better than losing it all.
Over-the-Counter Bulletin Board
The OTCBB is exactly as it sounds—a virtual bulletin board. Stocks that do not meet listing requirements for the regular OTCs will generally trade on the OTCBB. If a stock is not very large and deemed to be very risky it will not meet regular stock exchange listing requirements, and will find its way to the OTCBB. Despite failing to meet listing requirements, any company that wishes to trade on the OTCBB must file current financial statements with Securities and Exchange Commission (SEC) or another regulator. The OTCBB is a regulated electronic trading service, hence bulletin board, that will give real-time quotes, volume information and last-sale prices for stocks like penny stocks. Any stock that is listed on the OTCBB will have a suffix of “OB.”
Since the OTCBB does not function exactly like a stock exchange, bid ask prices must reach investors somehow. This happens through pink sheets. This is a publication complied and distributed by the National Quotation Bureau that contains the bid and ask prices for OTC stock, including penny stocks. If you were looking at stock listing, you could pick out stocks that are listed in the pink sheets by the “PK” at the end of the stock's symbol.