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A penny stock typically refers to the stock of a small company that trades for less than $5 per share. This type of stock normally has high price fluctuation, low liquidity, and facing a higher chance of quit the market. Normally we do not suggest public investors trade this kind of stock.
Penny stock is a type of stock, and its trading process, trading hours, and order type are the same as those of common stock.
Warm reminder: Because of the high risk of trading penny stocks, customers need to confirm the risk disclosure before trading it for the first time. They may continue trading only after completion of confirmation.
When the price of US stocks falls below $5, they are considered penny stocks. When customers open new positions in these US stocks, they need to confirm the risk, but there are no restrictions on closing positions.
Generally, short selling of penny stocks is not restricted. Please note that due to the perspective of risk management, EleBank may adjust the short-selling limits and short margin rates of some penny stocks from time to time.
Due to their nature of high volatility, Penny stocks may experience high price fluctuation.
Penny stocks lack a liquid market with few buyers, perhaps even after their price has increased.
There is limited information available on the company's financial soundness or track record.
Penny stocks have a high probability of fraud and bankruptcy of the underlying company.
Microcap refer to stocks with a market capitalization of US$300 million or less. These stocks typically exhibit low liquidity, wide bid-ask spreads, limited information transparency, and sparse media or analyst coverage. Due to potential financial irregularities or fraud risks—especially among OTC stocks—microcaps are frequent targets for market manipulation.
2.1.1 Pump and Dump
Process: Market makers or insiders accumulate shares at low prices -> generate artificial demand through false advertising, social media hype, or spam emails to drive up the stock price -> attract retail investors to follow the trend -> sell off at the peak, causing the stock price to crash.
Common Scenarios: The OTC market (especially Pink Sheets) and certain Nasdaq microcaps are prime targets.
2.1.2 False Information Manipulation
Spreading fake positive news (e.g., fabricated contracts, technological breakthroughs, or M&A rumors).
Using social media, forums, and paid promoters to entice retail investors into buying.
2.1.3 Wash Trading
Manipulators frequently trade shares among multiple accounts to create a false impression of high trading volume and active market interest, luring in unsuspecting investors.
2.1.4 Corners and Squeezes
Due to a very small float, market makers may secretly accumulate and control the majority of tradable shares. They then drive up the price through rumors or technical buying, forcing short sellers to cover or momentum buyers to purchase at inflated prices.
Why are Microcap Stocks Easily Manipulated?
Low Liquidity: Average daily trading volume may be only tens of thousands of shares, meaning a small amount of capital can significantly impact the stock price.
Low Institutional Participation: Institutions generally avoid microcaps. The market is primarily driven by retail investors and a few market makers, making regulatory oversight challenging.
Information Asymmetry: Corporate disclosures are often inadequate, allowing market makers or insiders to act ahead of the public.
Regulatory Coverage: Regulatory standards for the OTC market are lower than those of major exchanges, and resources for investigation and enforcement are limited.
Liquidity restrictions for trading microcap stocks are as follows:
On each trading day, the aggregate trading volume for any single micro-cap stock across all clients at EleBank (buy and sell orders combined) is limited to 10%-30% of the stock's 30-day Average Daily Volume (ADV). Orders exceeding this limit will not be executed.
On each trading day, the total trading volume for any single micro-cap stock per client (buy and sell orders combined) is limited to 5%-15% of the stock's 30-day ADV. Orders exceeding this limit will not be executed.
These parameters are subject to change. Please refer to the order page for the most current information.
