Penny Stock¶
A penny stock is a share of a small company trading below $5.00 per share, as defined by SEC Rule 3a51-1 under the Securities Exchange Act of 1934. The designation is determined by price, trading venue, and issuer financials — not by the literal cent value of the share. Most penny stocks trade over-the-counter on OTC Markets tiers (OTCQX, OTCQB, and Pink) rather than on a national exchange such as NYSE or Nasdaq.
HOW IT WORKS¶
The SEC test combines three factors: the stock must be priced under $5.00, quoted off a national exchange, and the issuer must fall below minimum financial thresholds — at least $2 million in net tangible assets for established companies or $5 million for those with fewer than three years of operations. Stocks meeting the definition trigger additional broker obligations, including delivery of a risk-disclosure document (Schedule 15G) and written suitability agreements. Penny stocks are also non-marginable under Regulation T, carrying 100% house maintenance requirements.
Wide bid-ask spreads are the defining structural cost. A stock quoted $0.77 × $0.83 carries an 8% round-trip spread before any price movement — meaning a buyer of 10,000 shares at $0.83 is immediately down 7.2% at the bid. Breaking even requires the stock to move nearly 8% in the trader's favor, purely to recover the spread.
IN TAPEBOARD¶
In the Tapeboard terminal, penny stocks appear prominently in the OTC scanner when filtering for relative volume above 5× — the threshold commonly associated with promotional or momentum-driven activity. The bid-ask spread is displayed in both dollar and percentage terms on the quote panel, letting traders assess round-trip cost before entry. Level 2 depth on OTC names typically shows thin size at each price level, visible in the order book view. Tapeboard flags non-marginable securities automatically, and the watchlist column for margin status shows "Non-Marg" on any sub-$5 OTC holding. Short sellers can check locate availability and borrow rate estimates directly from the position panel, which is critical given that borrow rates on promoted penny stocks frequently exceed 100% annualized.