Are penny stocks a scam?

"Penny stock" is a term for stocks from small companies that trade below $5 per share, and it does not imply that a stock is a scam. However, the low price and high risk of penny stocks make them popular in scams and securities fraud.

Penny stocks are particularly popular for pump-and-dump schemes, in which scam artists artificially raise interest in a shell company's low-value stock. When investors purchase shares and increase the price, the scammers sell their shares. Because the stock has no value outside of the interest generated by the scammers, the shares purchased by victims lose their value almost immediately.