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Finance Glossary

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Penny Stock

Definition:

Stocks that trade for very little—but not necessarily for a penny.

According to the NYSE, anything that trades under $5 a share is a penny stock. So basically, anything that costs less than a Starbucks.

Usually, these stocks come from companies that are in their last death throes (i.e., they've been caught in a huge lie and now the SEC wants to shut them down) or small companies that are volatile and speculative (hello, new startup created by a genius who lives in a bunker in the desert).

You might see ads in magazines promising you that you can make big bucks with penny stocks. These ads usually imply that penny stocks are a hidden, untapped resource for investors. But in reality, it's easy to lose your shirt in penny stocks. The idea of "there's nowhere to go but up" does not apply: You can buy a stock for $3 a share and watch it plummet even further—or watch the company fold, leaving you with a very expensive piece of paper and no money.

Buyer beware.