Penny stock
Encyclopedia
In the United States, penny stocks are common shares of small public companies
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...

 that trade at less than $1.00. In some countries, similar shares of stock are known as cent stocks.

Concerns for investors

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. 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
Pump and dump
"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, in order to sell the cheaply purchased stock at a higher price....

" sells their holdings. The expanding use of the Internet has made penny stock scams easier to perpetuate.

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.

Artificial inflation of penny stocks

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
Pump and dump
"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, in order to sell the cheaply purchased stock at a higher price....

". A pump and dump is a form of microcap stock fraud
Microcap stock fraud
Microcap stock fraud is a form of securities fraud involving stocks of "microcap" companies, generally defined in the United States as those with a market capitalization of under $250 million. Its prevalence has been estimated to run into the billions of dollars a year...

 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.

United Kingdom

In the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

, stocks priced under £
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...

1 are called penny shares.

Spain

In Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...

, Penny Stocks are the shares that cost cents. Usually they are called Chicharros.
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