As the name suggests, penny stocks are stocks that trade for a penny, i.e. a very small amount. Penny stocks in India can have market values below INR 10. In western markets, stocks trading below $5 are called penny stocks. They are also known as cent stocks. These stocks are very speculative in nature and are considered highly risky as they lack of liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information.
A penny stock generally trades below $10 a share and does not trade on major market exchanges such as the New York Stock Exchange (NYSE) and Nasdaq.
For instance, let's assume company XYZ is trading at $1 per share and is not listed on any national exchanges. Instead, it trades on the over-the-counter bulletin board. Therefore, company XYZ's stock is considered a penny stock.
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