Penny Stocks: The SEC Definition, the Broker Rules and Why They Are So Volatile

A penny stock, in U.S. law, is not just a cheap share. The SEC's Rule 3a51-1 defines it as any equity security that does not fall under one of its exclusions, and a common exclusion is a price of five dollars or more (17 CFR 240.3a51-1, eCFR, last amended April 15, 2024). In practice that leaves shares under $5 of small companies that are not listed on a qualifying national exchange, most of them quoted over the counter.

What the SEC counts as a penny stock

A stock is a penny stock unless at least one of these applies. The list follows the rule's paragraphs, simplified.

Two points follow from the rule. Penny stocks are not “usually listed on smaller stock exchanges”: a stock on a qualifying national exchange is excluded, so penny stocks are mostly traded outside exchanges. A cheap share on a major exchange is low-priced, but it is not a penny stock in the legal sense. And price alone does not decide: a company with enough assets or revenue is excluded even below $5.

The broker rules that come with penny stocks

Because a stock meets the definition, a broker that sells it to you has extra duties under the SEC's penny stock rules, unless an exemption applies.

Rule 15g-9 exempts, among others, an established customer: someone whose account at the broker has had a securities transaction or a deposit more than one year earlier, or who has made three purchases of penny stocks on separate days in different issuers. The texts are in the eCFR (17 CFR 240.15g-2; 17 CFR 240.15g-9). Expect this paperwork from any broker that offers them. Brokers and apps are compared in the best penny stock trading apps.

Why penny stocks are high volatility, and what we cannot measure

Low price, small companies, few shares traded and little public information make the moves large, and they also make the stocks easy to manipulate. We have no price history for penny stocks, so this page gives no volatility statistics for them. To put a number on “volatile,” here is a reference from markets we do have, using a stated rule: the 14-day average true range (Wilder) divided by the closing price, which gives the typical daily range as a share of price. The average true range is explained in ATR.

These are our computations on daily bars: the true range from the second bar of each series on, the first ATR as the simple mean of the first 14 true ranges, then Wilder's smoothing, each value divided by that day's close. For the S&P 500 ETF, with dividend-adjusted prices, that gives 1,448 daily values from January 25, 2021 to October 28, 2026: a median of 1.13%, a low of 0.65% on September 8, 2021 and a high of 3.87% on April 10, 2025. For Bitcoin, 586 values from March 22, 2025 to October 28, 2026: a median of 2.89%, from 1.87% on September 21, 2025 to 6.71% on February 7, 2026. These windows are the series charted on this site; over its full daily history since August 2017, Bitcoin's median is higher, 4.36%. A penny stock with an assumed 10% daily range, a figure we chose for illustration and could not measure, would have about nine times the median daily range of the S&P 500 ETF in this window. Before trading one, compute the same ratio on its own chart: it tells you how far your stop must be, and therefore how small your position must be (see position size).

For a hypothetical $10,000 account that risks 1%, or $100, per trade with a stop two ATRs from the entry, the stop sits 2.26% away on the ETF at its median reading, 5.78% away on Bitcoin and 20% away on a stock with an assumed 10% daily range. The position that loses $100 at the stop shrinks accordingly.

A four-step check of how volatile a penny stock is

1. Range. Compute ATR(14) divided by the close on its daily chart. In a hypothetical rule, a reading above 10% marks a stock whose typical day is about nine times wider than the S&P 500 ETF's.
2. Relative volume. Divide today's volume by the average daily volume of the last 20 sessions. A hypothetical reading of 3 or more means the stock is trading three times its usual amount; volume is explained in trading volume.
3. Spread. Divide the gap between the ask and the bid by the price. A spread of 5% means you lose 5% the moment you buy and sell back at once.
4. Filings. Check that the company files current reports. No recent filing means scarce information, which the SEC alert of July 29, 2015 links to manipulation.

The thresholds above are examples to adapt, not tested rules: we have no penny stock data to test them on.

Penny stock fraud: what the SEC and FINRA warn about

The alerts below describe the same scheme over more than a decade: a thinly traded stock, a promotion, and a sale by the promoters into the buying it creates.

• Manipulation. An SEC investor alert of July 29, 2015 says microcap stocks, “including penny stocks (the very lowest priced stocks), are more susceptible to stock price manipulation,” because information on them is scarce and they trade less (Investor.gov, Fraudulent Stock Promotions, July 29, 2015).
• Dormant shells. A FINRA and SEC alert of October 30, 2014 followed the SEC's suspension of trading in 255 dormant shell companies in February 2014, and describes “pump-and-dump schemes in which a fraudster deliberately buys shares of a very low-priced, thinly traded stock and then spreads false or misleading information to pump up the stock's price” (Investor.gov, Dormant Shell Companies, October 30, 2014).
• Spam and promotions. The alert “Don't Trade on Pump-And-Dump Stock Emails” of June 12, 2013 warns against buying on unsolicited e-mail tips (Investor.gov, June 12, 2013).
• Today's channels. FINRA's page of September 9, 2026 splits the scheme into three parts: the setup, when fraudsters pick a stock and quietly buy a large part of its public float; the pump, a promotion now run more and more through texts, social media ads and encrypted group chats; and the dump, a sale that can crash the price “sometimes in a matter of seconds.” FINRA adds that it has increasingly seen fraudsters target low-priced stocks listed on national exchanges, not only microcap stocks traded over the counter (FINRA, Avoiding Pump-and-Dump Scams). The role of a small float is covered in low float stocks.

Those “most successful penny stocks in history”

Lists of famous companies that “were once penny stocks” cite Amazon, Apple, Ford, Monster Beverage, AMD and others. The low prices quoted for these companies come from today's charts, where every past price is divided by all the stock splits since. In a hypothetical case, a share bought at $20, followed by a 2-for-1 split and two 10-for-1 splits that turn each share into 200, shows on today's chart at $0.10.

That $0.10 never existed on the market, and a stock listed on a qualifying exchange is not a penny stock under the SEC definition above, whatever its price. How splits change the price is explained in forward stock split.

The other problem is survivorship. The companies on these lists are picked because they survived and grew. The thousands of small companies that were delisted, went to zero or vanished after a promotion never make the list, so the list says nothing about the odds of a penny stock becoming a large company. We could not obtain the split histories from the companies' investor pages, so this page gives no historical prices for them. What happens to a share when the company fails is covered in what happens when a stock drops to zero.

Penny stocks vs. blue chip stocks

A low share price does not mean a small stake: $500 buys 5,000 shares at $0.10 or 2 shares at $250, and the risk depends on the company and the position size, not on the number of shares. More on what share counts mean in shares vs. dollars. The large-company side is measured in blue chip stocks vs. the S&P 500, and the other asset classes in asset classes.

If you still want to trade them

• Check that the company files reports and read them; scarce information is the first warning in the SEC alerts.
• Look at the spread and the volume before you buy, and use limit orders; see bid and ask.
• Risk only a small, fixed part of the account per trade, written in your trading plan.
• Screen with tools that show the float, volume and filings; see the best penny stock screeners and how to find penny stocks.