Stocks, primarily of small scale public companies, that trades at a relatively low price and usually traded over the counter through OTCBB and pink sheets, are called as Penny Stock. There are different parameters to categorize a stock as penny stock in various markets. According to Securities and Exchange Commission, every share below the basic value of $5 is accounted as Penny Stock. Most penny stocks are, however, below $1.
Trading a penny stock involves a high risk because they have low trading volume and reduced attention from investors. Penny stock is characterized by low liquidity and small capitalization.
Penny stocks are sweet target of manipulators. The manipulation technique involves purchase of penny stocks in large volume, followed by artificial inflation of prices. There can be misuse of media to spread false and misleading positive information. When mislead mass start purchasing the stocks, manipulators dump or sell their stocks. This cause a significant loss to purchasers while giving extraordinary percentage of profit to manipulator.
This does not mean people should stop investing in penny stocks as it is one of the few well known way to make it big. Surprisingly, penny stocks have been trading better than blue chip stocks for the past decade. Thus enabling many small timers to make it big.