Trading Stocks Under $1: What You Need to Know

What Defines a Stock Under $1?

A stock trading under $1 isn't just a lower price—it's a completely different market ecosystem. The SEC uses $5 as the threshold for requiring certain disclosures and exchange listings, but the real dividing line is the $1 mark. That's where major brokers draw the line for restrictions, and it's where legitimate companies nearly disappear.

The Price vs. Market Reality

The stock price itself is almost meaningless here. A $0.15 stock isn't "cheaper" than a $15 stock—it might actually be more expensive on a risk-adjusted basis. Here's why: that $0.15 stock could have 500 million shares outstanding (dilution) while the $15 stock might have 50 million shares.

Market capitalization matters infinitely more than share price. A $0.50 stock with 1 billion shares outstanding has a $500 million market cap—potentially a massive company by penny stock standards. The same price with 10 million shares outstanding is a $5 million company—a microcap that might be a shell or early-stage biotech.

Where Stocks Under $1 Trade

These securities trade on three markets, in order of legitimacy:

• OTC Pink Markets (OTCPK): Primarily speculative stocks. Some legitimate companies trade here by choice. No financial reporting required. Most pump-and-dumps originate here.
• OTC Markets Group (OTCM): Middle tier. Some small reporting companies. Better liquidity than pink sheets but still highly speculative.
• Gray Market / Unlisted: No ticker symbol. No reporting. Purely peer-to-peer trading facilitated by brokers. This is where scams live.

Real example: PROG (Progenity) traded under $1 in 2022 after dropping from $7.50. It remained OTC-listed despite its NASDAQ history because it failed to meet listing standards. Traders could still access it, but volatility was extreme.

The Liquidity Crisis: Why Your Exit Strategy Fails

This is the knife wound that kills most penny stock traders. Liquidity under $1 is a mirage.

Understanding Bid-Ask Spreads

On the Nasdaq, Apple (AAPL) typically has a bid-ask spread of $0.01. That's 0.004% of its $250 share price. On a $0.50 OTC stock, the spread might be $0.10—$0.05 bid / $0.15 ask. That's 20% slippage before you even buy.

Here's what happens in real trading:

1. You buy 10,000 shares at $0.12 (the ask price). Cost: $1,200.
2. Minutes later, you want to sell. The bid is now $0.10.
3. You sell all 10,000 at market. You get $1,000.
4. Instant loss: $200 (16.7%) without any change in the company's fundamentals.

This isn't theoretical. This is daily reality in OTC markets. Spreads often widen to 30-50% in less-liquid stocks, and on earnings announcements or news events, they can hit 100%+.

Volume Traps and the "No Bid" Scenario

Volume under $1 is misleading. A stock might show "50,000 shares traded" but that's across the entire day on a 500-million-share float. If you own 100,000 shares and want to exit, you're competing with everyone else for those same 50,000 daily shares.

Worst case: you place a sell order at market and there's literally no bid. Your order sits unfilled. Days pass. You finally accept a lower price or the stock collapses further while you're stuck.

This happened to traders holding CLFD (Ceribell, formerly Saluda Medical) when it was delisted from Nasdaq in late 2024. Volume dried up. Bid-ask spread exploded to 100%+. Early sellers escaped with partial losses; late holders were trapped.

The Manipulation Playbook: Tactics You Need to Recognize

Stocks under $1 are theaters for manipulation. These aren't subtle moves—they're brazen because enforcement is minimal and victims have minimal recourse.

Pump-and-Dump Schemes

The mechanics are simple and devastatingly effective:

1. Acquisition phase: Insiders and connected traders quietly accumulate shares at $0.05-$0.10.
2. The pump: Coordinated promotion via message boards, micro-cap research sites, Discord channels, and fake news releases. "Shell oil discovery!" "FDA approval incoming!" "Merger with Fortune 500 company!"
3. Retail FOMO: Average traders see volume spike and price rising. They pile in at $0.30-$0.50, thinking they've discovered the next big thing.
4. The dump: Insiders sell into the buying pressure. Price collapses back to $0.10 within days. Retail holders are down 70-80%.

SEC case example: In 2021, the SEC shut down a pump-and-dump targeting ZASH Global (ZASH). Organizers made $500K in illegal gains. The stock went from $0.15 to $2.50 back to penny-stock range. Of 10,000 retail participants, an estimated 9,400 lost money.

Reverse Splits and Dilution Bombs

A reverse split is legitimate when used correctly but weaponized when used in penny stocks:

Scenario: A stock at $0.03 announces a 1-for-50 reverse split. Your 100,000 shares become 2,000 shares, but the price jumps to $1.50. Sounds good, right?

Reality: The company issues 10 million new shares the same week at $1.00 per share. Your 2,000 shares are now diluted to 1.8% of the float (from 5%). The price tanks back to $0.20 on the new shares. Your $3,000 position is now worth $400.

GLOW (Glow Inc., formerly KKR real estate) executed exactly this pattern in 2022-2023. Three reverse splits in 18 months, massive share dilution, and the stock went from $80+ (pre-split) to under $0.01 split-adjusted value.

Fake News and Social Media Manipulation

I-hubs, Twitter/X penny stock accounts, and Discord channels run by people with undisclosed positions are standard. A single fake rumor ("acquisition offer at $5/share!") can move a $0.20 stock to $0.35 in minutes.

The advantage goes to the poster (who sold at the peak) and against retail traders (who bought the rumor).

Broker Restrictions: Why Most Retail Traders Can't Even Access This Space

If you've tried to buy stocks under $1, you've probably hit a brick wall. That's not an accident—it's deliberate risk management by brokers.

Which Brokers Allow OTC Trading?

Why Brokers Restrict This Market

Brokers aren't being paternalistic—they're managing liability. Here's the money talk:

• Regulatory risk: If a broker facilitates access to a pump-and-dump stock, the SEC can fine them millions. Better to block the entire category.
• Clearing house requirements: OTC trades are slower to settle. Brokers hold more capital in reserve. That costs them money.
• Customer litigation: Thousands of clients lose money, then sue the broker for "allowing them to trade" these stocks. Easier to restrict than defend lawsuits.

If you do gain access, assume you're on your own legally. The broker's terms will say "OTC stocks carry extreme risk" and you've waived certain protections.

Real Numbers: The Statistics of Penny Stock Trading

Before you allocate a single dollar, absorb these data points.

Win Rates and Loss Rates

According to the FINRA Office of Investor Education (2020 study), analyzing 350,000 retail trading accounts:

• 92% of penny stock traders lose money within 12 months.
• Of those who profit, the average gain is $50-$500 (gross, before taxes and fees).
• Of those who lose, the average loss is $2,000-$8,000.
• Account value drops below the initial investment 87% of the time within 6 months for penny stock traders.

For comparison, 65% of retail stock traders (all markets) lose money. Penny stocks are worse by a factor of 4x.

Time Decay and Opportunity Cost

Even if you break even on penny stock trades, the time cost is devastating. The average trader spends 15-25 hours per week monitoring OTC stocks for price action, news, and setup changes.

In that same 15 hours, you could have screened Nasdaq 100 stocks, built a diversified ETF position, or learned options strategies on liquid markets where edge actually exists.

Risk Management: The Only Thing That Separates Survivors From Casualties

If you choose to engage with stocks under $1, everything hinges on position sizing and loss acceptance.

Position Sizing Rules for OTC Trading

The standard "risk 1-2% per trade" rule becomes "risk 0.25% maximum per trade" in penny stocks:

• Portfolio size: $50,000
• Safe risk per trade: $50,000 × 0.25% = $125
• Stock price: $0.30
• Max shares: 415 shares
• Stop loss: $0.20 (33% below entry)
• Max loss if hit: $83 (acceptable)

This sounds tiny. That's the point. In OTC markets, tiny is the only size that lets you survive catastrophe.

The temptation is to ignore this and buy 5,000 shares at $0.25 because "it's cheap." One gap-down on a delisting announcement and you're down $500-$1,000 on a $50K account (5-10% wipeout from a single position). You can't recover from multiple of those.

Why Stop Losses Don't Work Here

You place a stop loss order at $0.20 on your $0.30 entry. Market opens, stock gaps down to $0.15 after an insider selling announcement. Your stop loss fills at $0.12. You've lost 60% instead of 33%.

This is called a "stop loss hunt." It's common on low-volume OTC stocks. Market makers deliberately tank prices to trigger stops, then buy the panicked shares.

Better approach: Mental stop losses (discipline to sell manually) or time-based exits (sell if no action within 10 trading days) work better than automated stops.

The "Total Loss" Baseline

Every dollar you allocate to stocks under $1 should be money you're prepared to lose entirely. Not "lose 30%" or "lose half"—lose 100%.

This isn't pessimism. It's realism. Delistings happen. Reverse splits into bankruptcy happen. Shell companies go dormant happen.

If you can't afford to lose it all without changing your lifestyle or retirement plans, it doesn't belong in penny stocks.

Common Mistakes: Pitfalls That Kill Traders

After 15 years watching retail traders in this space, these mistakes repeat every single cycle:

Mistake #1: Falling for the "Undervalued" Narrative

A stock trading at $0.05 with $100M in revenue seems "cheap" compared to a $50 stock. The retail narrative: "It's undervalued; it'll recover to $2!"

Reality: It's at $0.05 because the market priced in the risk. That might be justified. Bad management, declining revenue, lawsuit liability, or pending bankruptcy. The market isn't wrong often at that magnitude.

Mistake #2: Averaging Down Into Losses

You bought PROG at $0.80, it's now $0.40. You buy more at $0.40 to "lower your average." Now you own twice as many shares at an average of $0.60.

If the stock has fallen 50%, the reason probably isn't "temporary"—it's probably structural. Buying more is like doubling down on a broken thesis. You've turned a -50% position into a -100% if it goes to $0.30.

Mistake #3: Ignoring Float and Share Structure

Two stocks, both $0.30, both with $10M market cap. One has 33M shares outstanding (0.3M float after insiders). One has 33M shares outstanding but 31M are restricted and locked up.

The first has severe dilution risk (insiders can sell). The second has even worse dilution risk (restricted shares will eventually convert). You need to know the difference.

Mistake #4: Trading on Rumors Instead of Facts

The Discord channel is buzzing: "FDA approval announcement coming Friday!" You buy 5,000 shares at $0.25. Friday comes—no announcement. Stock drops to $0.18. You're out $350.

FDA approvals are public SEC filings. Real news doesn't leak in Discord. What leaks is speculation and coordinated pump attempts.

Mistake #5: Holding Illiquid Positions Too Long

You're up 40% on a penny stock position. You decide to hold for "better entry to sell." Days pass. Price drops to flat. You hold for "recovery." More days pass. Price is -30%. Now you're paralyzed, holding a losing position.

In illiquid markets, small gains evaporate fast. If you're up 30%+ on an OTC stock, serious consideration should be given to taking the win, not trying to squeeze out the last 20%.

Legitimate Use Cases: When Penny Stocks Make Sense

This isn't all doom. There are rare, specific scenarios where stocks under $1 have legitimate analytical edge:

Merger Arbitrage Plays

If a delisted or distressed company announces an acquisition at a fixed price, the OTC stock can trade at a discount to deal price.

Example: Company XYZ announces sale to buyer at $0.50/share. Stock trades at $0.40 due to deal risk. If deal closes, you make 25% on a binary event.

This only works if: (1) deal has SEC/regulatory approval, (2) price isn't at or below deal price already, (3) deal closing is >80% likely within 6-12 months.

Biotech Clinical Trial Results

A penny-stock biotech with cash runway for Phase 2 trial readout in 90 days might move 200%+ if results are positive. But the base case (negative results) means -80% to -100%.

Only viable if you've done the science deep-dive (not just message board claims) and position size reflects the 20% success rate.

SPAC Pre-Merger Plays

Some SPACs trade under $1 pre-merger. If you identify a quality merger target early, you get the leveraged upside at lower risk than post-merger.

But this requires structural analysis (management team track record, merger terms, exit strategy) not just "stock is cheap."

Next Steps: Learning Resources and Safer Alternatives

If you're genuinely interested in micro-cap and small-cap trading, there are paths with better risk-adjusted returns:

Alternatives to Stocks Under $1

• Nasdaq-listed small caps ($1-$10 range): Still speculative but with SEC reporting requirements, better liquidity, and broker support. MRVI, VERU, AGTC in past cycles.
• Russell 2000 micro-caps: Index exposure to small-cap rotation without single-stock risk. Average volatility and edge are higher than large-cap but lower than penny stocks.
• Biotech ETF exposure (IBB, XBI): Get clinical trial binary event exposure without picking single penny-stock biotech companies.
• Pre-IPO / SPAC exposure: Better structure than pink-sheet OTC. Real data, real regulatory oversight.

If You Still Want to Trade Penny Stocks

Respect these non-negotiables:

1. Open an account at TD Ameritrade or Interactive Brokers (best OTC access).
2. Start with a paper trading account (practice with virtual money first).
3. Trade only 0.25% risk max per position.
4. Create a trading journal documenting entry thesis, setup trigger, and exit reason for every trade.
5. Track your actual results. Most traders are wrong about their own performance.
6. Set a point at which you audit the strategy. If you're -20% after 20 trades, the strategy isn't working.

This article is part of our comprehensive Penny Stocks Trading Guide. Return to the hub for more strategies, screening techniques, and market analysis.