What are penny stocks and why are they risky?
Penny stocks are low-priced shares of small companies, usually under $5. They are risky because they often have small floats, frequent share dilution, wide bid-ask spreads and trading halts, so prices can move very fast in either direction.
A low share price is not the risk by itself. The risk comes from the structure around it.
Low float: when only a few million shares trade freely, a burst of buying or selling can move the price 20–100% in minutes. That speed works against you as easily as for you.
Dilution: many small companies raise money by issuing new shares through offerings or ATM programs. New supply often knocks the price down, sometimes right after a big run.
Spreads and slippage: the gap between the bid and ask can be several percent, so you can start a trade already down and get filled worse than expected on a stop.
Halts: exchanges pause trading after very fast moves. A halt can reopen far above or below where it stopped, jumping past your stop.
Because of this, small-cap traders size smaller, check float and filings before trading, and plan exits in advance.
Go deeper
- What makes a penny stock different (free)
- Float, share structure & dilution (free)
- Penny Stock Mastery course
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