Why $5?

Even though a stock may trade for more than just pennies, it can still be considered a penny stock because of its susceptibility to volatility.

Risk Factors

There are a few things that make penny stocks particularly risky. Among these factors are a general lack of information on the company available to the public, a lack of minimum standards to remain on the stock exchange, a lack of financial history and a low level of liquidity.

Penny Stock Fallacy

Many people believe that all stocks start as penny stocks at one point. This is untrue as it is common for stocks make their initial public offerings at a higher price and then split as the price rises. This somewhat explains the false conclusions that observers reach when examining an investment.

Upside

While there are great risks associated with investing in penny stocks, rewards can also be great. Although the high volatility can lead to catastrophic losses, it can also lead to fantastic gains.

Conclusions

Investors must be wary when investing in penny stocks as there is an extremely high risk associated with them. More often than not they are a good way to lose a lot of money rather than make a lot of money.

Source:

Investopedia: What is a penny stock?