Penny stocks are shares of companies that trade at low prices — typically anywhere from one cent to five dollars per share. The low-priced shares are usually associated with very small companies that are just getting started.
When the companies grow, the value of their shares increases, making money for anyone who owns the stock.
I just described the upside of trading in penny stocks, and it’s this potential for making money that explains the growing popularity of this type of investment vehicle. Of course, not all small companies thrive or even stay in business — which brings me to the downside of penny stocks: Should the company shrink, or run into any number of other problems that I describe later in this chapter, shares will decrease in value, leaving investors with a partial or potentially complete loss of their investment.