How are penny stocks typically characterized?

Penny stocks are typically characterized as stocks that trade at a very low price, often below $5. This definition is grounded in the nature of penny stocks, which generally represent smaller companies or those that are not listed on major stock exchanges. These stocks tend to have lower market capitalization and can be subject to higher volatility and risk. The low pricing makes them accessible to a broader range of investors, although this also means that they can be more susceptible to manipulation and illiquidity.

In contrast, stocks priced over $50 are generally associated with more stable and well-established companies, rather than the high-risk profile commonly seen with penny stocks. Stocks included in major market indices are typically those that have met specific criteria regarding market capitalization, financial stability, and trading volume, which does not apply to penny stocks. Additionally, stocks that have a consistent annual dividend typically reflect a company's solid financial performance and stability, which is not typical for penny stocks that often reinvest earnings back into operations or are struggling financially. By understanding these distinctions, it becomes clear why the characteristics of penny stocks are defined primarily by their low trading price.