Penny stocks or penny shares are a common stock that trade for less than £1 on UK stock exchanges or less than $5 on US stock exchanges. The low share price means the stock is likely to be a highly speculative investment.
Although the original definition of a penny stock is a stock that is valued under £1 or $5 in the UK and US respectively, they have been expanded to cover stocks valued over these guideline prices. In New Zealand, these assets with low share prices are also called "micro-cap stocks", and the Securities & Exchange Commission (SEC) are described as any stock under $5. They are usually characterised by very high volatility and are seen as higher-risk stocks, with the possibility of significant growth.
The appeal of penny stocks and penny shares is easy to see. If you have $1,000 to invest, you can get a considerably larger share percentage in a smaller company whose shares are trading for a few pence, rather than buying blue-chip shares which may cost much more for an extremely small percentage of ownership. And of course, if your penny share one day goes on to join the blue-chips, you could end up making large returns with the right trading strategy.