Share This Article

Facebook LinkedIn
Twitter Reddit
Print Email
Pinterest Gmail
Yahoo
Money Morning
×
  • Invest
    • Best Stocks to Buy
    • Stock Forecasts
    • Stocks to Sell Now
    • Stock Market Predictions
    • Technology Stocks
    • Best REITs to Buy Now
    • IPO Stocks
    • Penny Stocks
    • Dividend Stocks
    • Cryptocurrencies
    • Cannabis Investing
    • Angel Investing
  • Trade
    • How to Trade Options
    • Best Trades to Make Now
    • Options Trading Strategies
    • Weekly Trade Recommendations
  • Retire
    • Income Investing Guide
    • Retirement Articles
  • More
    • Money Morning LIVE
    • Special Investing Reports
    • Our ELetters
    • Our Premium Services
    • Videos
    • Meet Our Experts
    • Profit Academy
Login My Member Benefits Archives Research Your Team About Us FAQ
  • Invest
    • Best Stocks to Buy
    • Stock Forecasts
    • Stocks to Sell Now
    • Stock Market Predictions
    • Technology Stocks
    • Best REITs to Buy Now
    • IPO Stocks
    • Penny Stocks
    • Dividend Stocks
    • Cryptocurrencies
    • Cannabis Investing
    • Angel Investing
    ×
  • Trade
    • How to Trade Options
    • Best Trades to Make Now
    • Options Trading Strategies
    • Weekly Trade Recommendations
    ×
  • Retire
    • Income Investing Guide
    • Retirement Articles
    ×
  • More
    • Money Morning LIVE
    • Special Investing Reports
    • Our ELetters
    • Our Premium Services
    • Videos
    • Meet Our Experts
    • Profit Academy
    ×
  • Subscribe
Enter stock ticker or keyword
×
5 Ways to Beat the Fed (and Crush Inflation)
Twitter
Tags: penny stocks
Stocks: NERO

What Is a Penny Stock?

By Money Morning News Team, Money Morning • June 20, 2017

Start the conversation

Comment on This Story Click here to cancel reply.

Or to contact Money Morning Customer Service, click here.

Your email address will not be published. Required fields are marked *

Some HTML is OK

Simply put, penny stocks are stocks that trade below $5 per share and have a very small market cap. They can trade outside of the major stock exchanges and are often bought and sold on the less regulated pink sheets or over-the-counter (OTC) exchanges. However, there are some penny stocks from larger companies that can be found on main exchanges.

Video
3 Strategies for Investing in Penny Stocks

The share price is the biggest factor in classifying a stock as a penny stock. The U.S. Securities and Exchange Commission (SEC) considers any stock trading under $5 a share to be a penny stock. If it trades above that level but still has a small market cap, it can be classified as a small-cap stock. These small-cap companies usually have a market cap between $300 million and $2 billion.

Having said that, penny stocks are typically small companies that usually don't follow the same regulatory standards and listing requirements that higher-priced stocks on major exchanges do. Many of them trade on the pink sheets or OTC exchanges, which are less regulated than larger exchanges like the Nasdaq or New York Stock Exchange (NYSE).

This is where some risks come into play...

Why Penny Stock Investing Can Be Dangerous If You're Not Careful

Since penny stocks have less liquidity and are more volatile than larger stocks, they're considered risky investments. As such, penny stocks are better suited for investors who have the capital needed to better tolerate risk. That's why we recommend that they only ever comprise about 2% of your total portfolio.

They're also considered risky because they can be a breeding ground for scammers trying to take advantage of investors seeking quick profits. Penny stock fraud has become a widespread practice, with more than 1,300 companies being suspended from trading over SEC investigations.

Sign up for SMS so you never miss special events, exclusive offers, and weekly bonus trades.

The most prominent type of scam involves what's known as "shell companies." Often used by shady business dealers, these are companies that don't have any known business operations or financial assets. They're essentially fake businesses that can be used to cheat unknowing investors out of their money.

A modern example of a shell company penny stock scam is Neuromama Ltd. (OTCMKTS: NERO).

Shares of Neuromama, which claims to make some sort of neural network-based search engine, soared 254% from $15.90 in April 2016 to $56.25 in August 2016.

While that price range technically disqualifies it as a "penny stock," the big concern was the company's explosive market cap. At $56.25 a share, Neuromama had a market cap around $35.4 billion - about 4.7% larger than Tesla's than $33.8 billion market cap.

what is a penny stock
This was a huge red flag for the SEC, which suspended trading for NERO stock on Aug. 15, 2016. The agency cited concerns over "potentially manipulative transactions" and the "identity of the persons in control" as reasons for the suspension and investigation.

But it was the business practices, or lack thereof, that were the SEC's biggest concern. The company had not reported any financials on its search product during the three years leading up to the trading halt. Even stranger was the company's reported movement of operations from southwest Siberia to a town near Tijuana, Mexico.

A Fortune report found the leader of the Neuromama stock manipulation was a man named Vladislav "Steven" Zubkis. The Ukraine native went by Steven Schwartzbard at Neuromama and controlled the shell companies that served as Neuromama's financiers and advisory board. He is notorious for financial fraud and has been cited in several cases dating back to 1993, including one with an alleged shell firm called Jutland Enterprises.

The Best Pot Stocks: After months of research, we've found the most lucrative and fastest-growing legal pot stocks in America. And for a limited time, you can get all the details for free. Learn more...

Despite horror stories like this, not every cheaply traded stock is trying to cheat you out of your money. Here at Money Morning, we're dedicated to making sure you know how to spot unsafe investments and two-bit con artists.

And there's one crucial thing to look for in a company that indicates whether or not it's safe for your money...

1 Detail to Look for When Searching for Safe Penny Stocks

Join the conversation. Click here to jump to comments…

Login
guest
guest
0 Comments
Inline Feedbacks
View all comments


Latest News

May 27, 2023 • By Garrett Baldwin

postcards from the florida republic - may 27

May 26, 2023 • By Garrett Baldwin

Here's Your (Surprising) Best Bet in a U.S. Default

May 26, 2023 • By Shah Gilani

earnings
The Five Things You Need to Know Before Buying Any Stock
Trending Stories
ABOUT MONEY MORNING

Money Morning gives you access to a team of market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.

QUICK LINKS
About Us COVID-19 Announcements How Money Morning Works FAQs Contact Us Search Article Archive Forgot Username/Password Archives Profit Academy Research Your Team Videos Text Messaging Terms of Use
FREE NEWSLETTERS
Total Wealth Research Power Profit Trades Profit Takeover This Is VWAP Penny Hawk Trading Today Midday Momentum Pump Up the Close
PREMIUM SERVICES
Money Map Press Home Money Map Report Fast Fortune Club Weekly Cash Clock Night Trader Microcurrency Trader Hyperdrive Portfolio Rocket Wealth Initiative Extreme Profit Hunters Profit Revolution Warlock's World Quantum Data Profits Live Trading Alliance Trade The Close Inside Money Trader Expiration Trader Flashpoint Trader Darknet Hyper Momentum Trader Alpha Accelerators Weekly Profit Cycles Brutus Alerts Resource Traders Alliance

© 2023 Money Morning All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning.

Address: 1125 N Charles St. | Baltimore, MD, 21201 | USA | Phone: 888.384.8339 | Disclaimer | Sitemap | Privacy Policy | Whitelist Us | Do Not Sell or Share My Personal Information

wpDiscuz