Penny stock is common stock issued by small companies, and it generally trades at $1 to $5 per share. Penny stocks trade on several public exchanges, each of which has its own price restrictions. Companies may register as penny stock issuers with the Securities and Exchange Commission and be subject to various financial requirements upon their initial public offering, but the actual exchanges set their own price minimums. As with any stock, penny stocks can lose all of their value, and the share price can fall to zero. In terms of ongoing price minimums, if a penny stock's price falls below $1 for at least 30 consecutive days, it may be delisted.
Most penny stocks that are delisted for not meeting the $1 per share threshold end up trading as "pink sheet" or "over-the-counter" stocks. Pink sheets and the OTC bulletin board function more as national quotation systems, have minimal listing requirements and often do not require companies to disclose financial results. This results in low liquidity and low investor confidence. As of this piece's publication, since 1997, when the $1 price floor was instituted, roughly 2,000 Nasdaq stocks have been delisted, most of them penny stocks that were unable to consistently trade at more than $1 per share. On July 26, 2014, RadioShack Corporation was notified by the New York Stock Exchange that it faced delisting, because its stock had traded at below $1 per share for more than 30 days. By Feb. 5, 2015, the company had filed for bankruptcy and its stock traded at 13 cents per share.
Reverse Stock Splits
To avoid delisting, companies sometimes engage in reverse stock splits. A stock split is when a company decreases the value of each share of stock but increases the number of outstanding shares required to maintain its market capitalization. A reverse stock split does the opposite, increasing the share price while decreasing the number of outstanding shares. Investors generally view this transaction negatively. Some exchanges maintain minimum market capitalization and shareholder number requirements, making it difficult to use this type of loophole.