Penny stocks are equity shares that trade on junior stock exchanges for less than $5 per share. These are often risky and unproven companies, with few making it big.
What it means:
The stocks you hold in your Registered Retirement Savings Plan (RRSP) are typically priced between $5 and $200 a share. A penny stock, by contrast, can be had for less than $5. That either means it was issued at a higher price and has fallen, or it is a small- or even micro-cap stock trading on a junior exchange such as the TSX Venture or Canadian Securities Exchange. (Senior exchanges, such as the New York Stock Exchange and Toronto Stock Exchange, require listings to maintain a minimum stock price and market capitalization.) While companies list on these exchanges to raise money for growth, just like a larger business would, many of these businesses are small and unproven operations. Some smaller exchanges don’t require the same company disclosures as larger ones, so it can be hard for investors to find out if these businesses are worth buying into. As well, penny stocks tend to be lightly traded, so a price increase of just a few pennies represents a major percentage gain. That means there’s potential to make money quickly, but there’s an equal chance of losing. Because of these risks, penny stocks are suitable investments only for people who are prepared to do their own research into the sector and company.