Is a penny stock any stock under $1?

No. The SEC's definition uses a $5 line, not $1, and it also looks at where the stock is listed and how large the issuer is. People often use "penny stock" loosely for any very cheap stock, but the legal term in Rule 3a51-1 is narrower than that.

Are all penny stocks on the OTC markets?

No, but most are. A stock listed on a qualifying national exchange is generally outside the SEC definition, so the penny stock label mostly attaches to securities quoted over the counter. A stock can also move from one to the other as it is listed or delisted.

Why do brokers make me sign extra forms for penny stocks?

SEC Rules 15g-2 and 15g-9 require brokers to give you a risk disclosure document and to approve your account for penny stock trades before the first one. Some transactions are exempt; Rule 15g-9, for example, exempts trades with an established customer.

Can penny stocks be traded on Nasdaq?

A Nasdaq-listed stock can trade at a low price, but it is generally not a penny stock under the SEC rule because exchange listing standards are one of the exclusions. Falling below a listing price rule can lead to a deficiency notice, which is a separate process.

How do I find out if a company is current in its filings?

Search the company on SEC EDGAR and look at the dates of its latest 10-K and 10-Q. If it is not an SEC filer, check the disclosure it posts on OTC Markets, and treat missing or stale information as a risk in itself.

Penny Stocks: What They Are, Risks and How They Trade

A penny stock has a specific SEC definition: generally under $5, off a qualifying exchange, from a small issuer. How the rule works and where the risks sit.

A penny stock, under SEC rules, is generally an equity security priced under $5 per share that does not trade on a qualifying national exchange and whose issuer is below set size thresholds. The legal definition sits in Exchange Act Rule 3a51-1, and it triggers extra broker obligations under the “penny stock rules.” This matters to retail investors in micro-caps because the label affects how your broker handles the order, what you are shown first, and how much information exists about the company.

The SEC definition, step by step

Rule 3a51-1 defines a penny stock by starting with “any equity security” and then excluding categories. A security is not a penny stock if it falls into an exclusion. The main ones:

Exclusion	What the rule says
Exchange-listed (a)	NMS stocks on certain national securities exchanges, or listed on an exchange or an automated quotation system sponsored by a national securities association whose initial listing standards meet or exceed set criteria.
Price (d)	The security has a price of $5 or more. For a trade, that means it was bought or sold at $5 or more, excluding commissions and mark-ups. Outside a trade, it means the inside bid is $5 or more.
Issuer size (g)	Net tangible assets above $2,000,000 if the issuer has operated continuously for at least three years, or above $5,000,000 if less than three years; or average revenue of at least $6,000,000 for the last three years.
Other	Registered investment companies, options issued by the Options Clearing Corporation, and security futures products.

The exchange-listing exclusion has its own quantitative tests, which include a minimum bid price of $4 per share, 300 round lot holders and at least 1,000,000 publicly held shares with a market value of at least $5 million. The issuer-size exclusion only works if the numbers come from financial statements dated less than 15 months before the transaction and audited by an independent accountant.

So “penny stock” is a test applied to a security at a point in time, not a permanent tag. A stock quoted at $0.80 on the over-the-counter market with a small company behind it will usually meet the definition. A stock that trades at $0.80 but is listed on a qualifying exchange generally will not, though it may face listing rule consequences for its price. See Nasdaq listing requirements for how that process works.

FINRA describes penny stocks as “typically” issued by very small companies that trade at less than $5 per share, and microcap stocks as those with a market capitalization of less than $250 to $300 million. The terms overlap but are not the same. See small cap vs micro cap vs nano cap.

What the penny stock rules require from your broker

A broker that sells you a penny stock has a stack of obligations under Rules 15g-2 through 15g-9:

Risk disclosure document (Rule 15g-2). Before the first transaction, the broker must give you the Schedule 15G document and get a signed, dated acknowledgment. The broker cannot execute a trade less than two business days after sending the document.
Quotes (Rule 15g-3). The broker must disclose the inside bid and offer quotation, or the dealer’s own prices where no inside quote exists.
Compensation (Rule 15g-4). The broker must disclose the aggregate compensation it received on the transaction, orally or in writing before the trade and in writing at or before the confirmation.
Monthly statements (Rule 15g-6). For months in which you hold a penny stock bought through the broker, a written statement is due within ten days after month end, with exemptions for long inactivity.
Account approval (Rule 15g-9). The broker must collect information on your finances, experience and objectives, determine that penny stock trading is suitable for you, deliver a written statement of that basis and get your signed copy. It also needs your written agreement to the specific transaction, and cannot sell less than two business days after sending the statement.

Rule 15g-9 has exemptions, including transactions with an established customer and certain private placements. If a broker’s account application asks for a penny stock acknowledgment, this is why.

How penny stocks trade

Many microcap stocks trade over the counter. The SEC says quotes can come from a broker-dealer directly or through systems such as OTC Link ATS. There are no exchange minimums: companies listed on exchanges must meet standards such as minimum net assets and numbers of shareholders, while OTC securities may have only the criteria of the quotation system, plus Rule 15c2-11 limits on quoting companies without current public information. For the tier structure, see OTC markets explained.

Two mechanics matter most for low-priced stocks.

The spread. The SEC’s Schedule 15G penny stock disclosure document notes that a spread large compared with the purchase price can make a resale very costly. Illustration: a stock is quoted $0.10 bid and $0.12 offer. A buyer who pays the $0.12 offer and sells immediately at the $0.10 bid gets back about 16.7% less than they put in, before any commission. The same two-cent gap on a $50 stock would be invisible.

Thin volume. The SEC notes that because many microcap stocks trade in low volumes, any size trade can have a large percentage impact on the price. A market order for a size the market cannot absorb can fill at prices well away from the last quote. Limit orders exist for this reason; see what is a market maker for who stands on the other side.

The risks, as the SEC and FINRA describe them

The SEC’s microcap bulletin lists these:

Lack of public information. Often the biggest difference from other stocks. If a company does not report to the SEC, information on management, operations and financials may be hard to get.
No minimum listing standards. Exchange listing standards do not apply to OTC stocks.
Lack of liquidity. Stocks with low liquidity can be hard to sell, and a sale can have a noticeable effect on the price.
High volatility. Microcap stocks have historically been more volatile than stocks of larger companies.
Fraud. Limited information and thin trading make it easier to manipulate price or volume.

FINRA adds that some OTC low-priced securities aren’t registered with the SEC, and that red flags include guaranteed-return claims, unsolicited social media or email promotions, a lack of current SEC filings and frequent changes of name, ticker or business.

What to check in the filings

The point of EDGAR for a penny stock is to replace rumor with a dated document.

Is the company an SEC filer? Search EDGAR by name or ticker. The filing list shows the latest 10-K (annual) and 10-Q (quarterly) and their dates. Late-filing notices (Form NT 10-K, NT 10-Q) show up in the same list.
Which exemption applies? The 10-K balance sheet shows total assets, intangibles and liabilities, which lets you compute net tangible assets against the $2 million and $5 million lines in Rule 3a51-1(g). The income statement shows revenue against the $6 million three-year average.
Who owns it? Schedules 13D and 13G and Forms 3 and 4 show large holders and insider transactions. The SEC lists heavy insider ownership as a microcap red flag. See float vs shares outstanding.
Is there new stock coming? Look for registration statements (S-1, S-3) and prospectus supplements (424B), and for 8-Ks that report unregistered sales or convertible financing. See stock dilution.
Any SEC action? The SEC can suspend trading in a stock for up to 10 business days, for example where there is a lack of current and accurate information. Suspensions are published on sec.gov. See SEC trading suspensions.

Red flags vs normal

Neutral, mechanical signals worth separating:

Usually just a feature of the market	Warrants a closer look at the documents
A wide bid-ask spread on a low-volume stock	A price or volume spike with no filing or news to explain it
An OTC quote with no exchange listing	No current 10-K or 10-Q, or no OTC disclosure posted
A penny stock risk document from your broker	Paid promotion by email, text or social media (the SEC calls these pump-and-dump risks)
A reverse split recorded in an 8-K	Frequent name, ticker or business changes

None of these says anything about a particular company. They tell you where to look.

For a research process that puts this together, see how to research a micro-cap. For brokers that handle low-priced and OTC stocks, see best brokers for penny stocks.

FAQ

Is a penny stock any stock under $1?: No. The SEC's definition uses a $5 line, not $1, and it also looks at where the stock is listed and how large the issuer is. People often use "penny stock" loosely for any very cheap stock, but the legal term in Rule 3a51-1 is narrower than that.
Are all penny stocks on the OTC markets?: No, but most are. A stock listed on a qualifying national exchange is generally outside the SEC definition, so the penny stock label mostly attaches to securities quoted over the counter. A stock can also move from one to the other as it is listed or delisted.
Why do brokers make me sign extra forms for penny stocks?: SEC Rules 15g-2 and 15g-9 require brokers to give you a risk disclosure document and to approve your account for penny stock trades before the first one. Some transactions are exempt; Rule 15g-9, for example, exempts trades with an established customer.
Can penny stocks be traded on Nasdaq?: A Nasdaq-listed stock can trade at a low price, but it is generally not a penny stock under the SEC rule because exchange listing standards are one of the exclusions. Falling below a listing price rule can lead to a deficiency notice, which is a separate process.
How do I find out if a company is current in its filings?: Search the company on SEC EDGAR and look at the dates of its latest 10-K and 10-Q. If it is not an SEC filer, check the disclosure it posts on OTC Markets, and treat missing or stale information as a risk in itself.