Penny stock

Encyclopedia : P : PE : PEN : Penny stock

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In the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered perjorative. However the official Securities & Exchange Commission definition of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or NASDAQ) or an "over the counter" listing service, such as the OTCBB or Pink Sheets. The terms penny stocks, microcap stocks, small caps, and nano caps are also all sometimes used interchangeably, however per the SEC definition, penny stock status is determined by share price, not market capitalization or listing service.

Penny stocks generally have market caps under $500M and are considered extremely speculative, particularly those that trade on low volumes over the counter. The Securities and Exchange commission warns that, "Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment."

Many new investors are lured to the appeal of penny stocks due to the low price and potential for rapid gains which in some cases may be as high as several hundred percent in a few days. Similarly, severe drops also occur and many penny stocks can drop over 99% in the long term. Accordingly, the SEC warns that penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud.

In terms of liquidity, since a penny stock has fewer shareholders, it is less 'liquid', meaning it will not trade as many shares per day as a larger company. Any sudden change in demand or supply of stock can lead to a lot of volatility in the stock price. This lack of liquidity can send a stock price soaring up quickly or come crashing down. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation by management, market makers, or third parties. A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day.

Secondly, unlike NASDAQ or the NYSE, there are only minimal listing requirements for a stock to remain on the OCTBB, namely that they make their filings with the SEC on time. In fact, companies that fail to meet minimum standards on one of the broader exchanges and are delisted often relist on the OTCBB or the Pink Sheets.

Furthermore, stocks trading on the Pink Sheets (recognizable with a .PK suffix) have little to no regulatory or listing requirements whatsoever, at least compared to major markets. There are no minimum accounting standards, change in notification of ownership of shares, and reported other material changes affecting the financial viability of a company, all of which are designed to protect shareholders.

Penny stocks therefore can be used in a number of fraudulent schemes, from pump and dump, short-and-distort, and selling chop stocks -- the last being a scam in which shares acquired for pennies under Regulation S and then illegally sold to overseas or domestic retail investors. Other schemes typical of penny stock scams include spam e-mails and junk faxes that tout ludicrous and fraudulent claims , crooked newsletter writers who promote a stock for a fee, message boards swarming with "buy now!!!" postings about a stock from anonymous, paid posters,, fake or misleading press releases issued by the company, or boiler rooms full of cold-callers targeting naive, elderly, or foreign buyers, all in attempt to drive up the share price while the insiders sell.

While not all stocks listed on the Pink Sheets or the OTCBB are fraudulent, one Business Week article estimated that "chop stocks make up perhaps half the 85 million-share daily volume of the OTC Bulletin Board."

Some websites exist that claim to offer unbiased research and tips for penny stocks. They will generally charge a nominal fee for access to their websites, and claim not accept payment or shares to feature a company in their newsletters or websites. It should be noted however that not a single mainstream financial media outlet, from the Wall Street Journal to Jim Cramer to the stock listings printed in local newspapers, covers OTCBB or Pink Sheets stocks, apart from the occasional cautionary tale.

External links

• Penny Stock Information
• * [The Lowdown on Penny Stocks]
• * [What are the Pink Sheets?]
• * [Microcap Stock: A Guide for Investors]
• * [Penny Stock Rules from the SEC]

• Penny Stock Fraud
• * [What is Penny Stock Fraud?]
• * [The SEC on Pump-and-Dump stock Schemes]
• * [Article on "Chop Stocks" and stock fraud]
• * ["The Mob on Wall Street"] Business Week article
• * [SEC Testimony on Organized Crime in the Markets]

References