Penny stocks now include stocks priced up to $5 to cover risky small companies.
Most penny stocks trade outside main exchanges, often with higher fraud risk.
Cheap stocks can still swing sharply in price, making them high-risk investments.
Penny stocks used to mean exactly what the name suggests: stocks that cost only a few cents or are under a dollar. They were known to be cheap, risky, and full of stories about people either striking gold or losing everything.
However, this definition has become outdated. In the current market situation, penny stocks can cost up to $5. The change did not happen by accident. It is the result of years of revision molded by scams, new laws, and the workings of stock markets.
In the 1980s and 1990s, penny stock scams were quite common. Small companies would sell shares for pennies, claiming big profits were just around the corner. People bought in, prices spiked, and the insiders who owned most of the stock sold their shares when the prices peaked, leaving everyone else with worthless papers. These pump-and-dump schemes forced regulators to step in.
However, fraudsters quickly found a loophole and priced their stocks just above a dollar, at $1.50 or $2.00, to dodge the rules. To close that gap, the US Securities and Exchange Commission (SEC) expanded the definition. Today, any stock trading below $5 is officially a penny stock. This gives regulators more room to keep a closer eye on companies that are cheap, thinly traded, and risky for small investors.
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Under the newer definition, a company’s stock priced under $5 is called a penny stock. These companies are often small, do not make much profit, and trade outside big exchanges like the NASDAQ or NYSE. These are over-the-counter (OTC) stocks that are traded in markets where rules are flexible and fewer details are shared with investors.
The change from $1 to $5 was enforced to protect small-cap investors from potential scams. By raising the limit, regulators now cover a wider group of volatile companies. It is also mandatory for brokers to follow the new rules, including sharing more details about the risks before selling penny stocks to anyone.
Major exchanges have their own rules that help keep the penny stock label away from established companies. For example, the NASDAQ usually requires a stock to trade above $4 to stay listed. If a company’s stock price falls below that level for too long, it can get delisted and moved to the OTC markets, where scams and price swings are more common.
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Penny stocks still attract attention because they look like a quick way to earn large profits. The idea of purchasing thousands of shares for a small amount of money is exciting. However, cheap does not always mean good value. Stocks that trade under $5 are often found in the range for a reason: maybe the company is struggling, has little revenue, or is facing major risks.
Even though many penny stocks cost more than a dollar now, they can still move sharply. News, rumours, or a few social media posts can cause massive price jumps or crashes. Most experienced investors consider them as high-risk bets instead of long-term investments.
The threshold for penny stocks has moved up from $1 to $5. This is the SEC’s approach to curb unethical scams in the OTC markets. The change has made trading safer and helped reduce fraud aimed to trap everyday investors.
However, the stock market always carries risks, and investors are always advised to thoroughly research the firms, sectors, and geopolitical situations before investing their hard-earned money.
1. Why are penny stocks no longer just under $1?
The SEC raised the limit to $5 to cover more small, risky companies and close fraud loopholes.
2. Where do most penny stocks trade today?
Most trade outside major exchanges on over-the-counter (OTC) markets with fewer regulations.
3. Are penny stocks safe investments?
No. Even stocks under $5 can swing sharply in price, making them high-risk, short-term bets.
4. How did penny stock scams influence regulations?
Pump-and-dump schemes forced regulators to expand definitions and enforce stricter disclosure rules.
5. Can a company with a $4 stock still be called a penny stock?
Yes. Stocks under $5, often small and unstable, are still classified as penny stocks today.