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They are also under the strong
supervision of the SEC, the Securities and Exchange Commission.
Penny stocks are usually traded on
the OTCBB or on the Pink Sheets. The OTCBB (OTC Bulletin Board) is an
electronic quotation system for over-the-counter securities that are not
listed with one of the national stock exchanges. The only requirement is
that the companies file financial reports to the SEC. If not, the company
is removed from the OTCBB listing and the stock can only be quoted on the
Pink Sheets. The Pink Sheets activities are not supervised or regulated by
the SEC.
If the company has less than $10 million in total assets or less than 500
shareholders in total then no filings must be done at all.
Penny stocks are for these reasons wide open to scams and manipulation.
The stock price is usually far below $5 and market capitalization is very
small as the companies itself are very small. The lack of reporting
requirements can make it difficult to find verified information about the
company, its financial situation and outlook.
Many fraudsters take advantage of this and publish misleading information
to manipulate the stock price. Because of the lack of public interest and
low number of shareholders the trading volume is generally low. This means
that a few buy or sell orders can have dramatic effect on the share price.
The low liquidity is at the same time the biggest advantage of penny or
micro-cap stocks. While a listed stock can almost never move several
hundred percent within a few days, a penny stock can do that easily. The
low share price makes it possible to acquire a big amount of shares with a
small amount of money. Little price increases or decreases have therefore
big impact on the performance.
The low stock prices and limited capital requirements often attract novice
traders but penny stocks are definitely a playing field for experienced
investors only. Penny stocks are high risk investments. Many companies
won't probably succeed and go bankrupt. The shares will end up worthless.
Many penny stock companies have no or very limited working capital, assets
or are in development stage for months or years before any revenues can be
expected. Be aware that you probably can't sell your shares for days or
weeks or only at a big discount because of the limited liquidity.
By:
David
A. Sorenger -
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