Penny stocks are defined by the Securities and Exchange Commission (SEC) as those stocks that don't typically trade on a stock exchange such as the New York Stock Exchange or NASDAQ and that sell for less than $5. Low-priced speculative stocks such as penny stocks are considered very risky. The very small companies that issue penny stocks don't have to have audited financial reports with the SEC. Also, because there are few investors and low trading volume, understanding their value can be difficult. Penny stocks are often the subject of scams and fraud in which early buyers promote the stock, perhaps falsely, and then, when the price has risen, sell their investment.
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