Why Are Penny Stocks No Longer Less Than $1?

Many investors still think penny stocks are shares trading for less than a dollar, but that definition is decades out of date. In the past, penny stocks were considered any stocks that traded for less than $1 per share. However, rampant fraud in the 1980s compelled the U.S. Securities and Exchange Commission (SEC) to broaden its definition to include all shares trading below $5.

The revision wasn’t arbitrary: fraudsters had learned to price stocks just above $1 to escape regulatory scrutiny, and regulators recognized that a stock trading at $4.50 could pose greater risks than one at $0.50, especially when backed by companies with questionable fundamentals.

Why Congress Chose $5 Over $1

The decision to set the threshold at $5 rather than $1 came after many fraud schemes in the 1980s, some of which included the mob. In the lead-up to passing the Penny Stock Reform Act of 1990, lawmakers discovered that fraudulent schemes weren’t limited to sub-dollar stocks—they frequently involved securities trading between $1 and $5 a share.

Two additional problems were linked to the rampant fraud:

• A lack of public information on these stocks, which made it easier to manipulate share prices.
• The presence of a large number of promoters and others associated with penny stock issuers and broker-dealers who were repeat offenders under securities laws, convicted felons, or had ties to organized crime.

The 1980s Wild West

The 1980s penny stock market resembled a financial Wild West, dominated by notorious boiler room operations with names like Blinder Robinson—nicknamed “Blind’em and Rob’em” by industry insiders. Other major penny stock brokerages included First Jersey Securities, Rooney Pace, and Stuart-James. Major penny stock brokerages operating in the 1990s included Stratton Oakmont, Sterling Foster, A.S. Goldmen, and Hanover Sterling.

These firms employed armies of high-pressure salespeople working from cramped offices, cold-calling unsuspecting investors with promises of overnight riches.

The era’s rampant securities-related crimes inspired the 2013 film The Wolf of Wall Street, which dramatized the pump-and-dump schemes that made Stratton Oakmont. Pump-and-dumps rely on artificially inflating a stock’s price, with insiders then selling their shares at the peak for massive profits, leaving others with worthless holdings. These schemes typically target penny stocks because they’re easier to manipulate due to thin trading and limited public information.

These frauds haven’t gone away. The boiler rooms of the 1980s have largely been replaced by sophisticated social media campaigns, encrypted messages, and email blasts, but the structure remains the same. For example, in 2022, the SEC uncovered a massive pump-and-dump scheme involving 16 defendants across three continents who generated more than $194 million in illicit proceeds.

Do Major Exchanges Allow Penny Stock Trading?

Most penny stocks don’t trade on major exchanges. However, shares of some companies with large market capitalizations trade below $5 each on the Nasdaq or New York Stock Exchange.

To trade on major stock exchanges penny stocks must meet specific listing requirements. For example, the Nasdaq requires a share price of at least $4.00. However, a company can remain on the exchange with a lower price if it meets other requirements. Stocks must also have a minimum of 1 million publicly traded shares outstanding (excluding those held by insiders who own more than 10% of the company).

The Bottom Line

The $5 penny stock threshold reflects regulatory evolution aimed at protecting investors. While the term “penny stock” suggests extremely low prices, the SEC’s latest definition captures a broader range of highly speculative, low-priced securities.