Everything You Need To Know About Penny Stocks

Penny stocks don't meet the listing requirements which is why you won't normally see them in major exchanges like NYSE or NASDAQ

. Stocks need to reach certain criteria if they are going to be listed, such as a minimum number of shareholders, a minimum assets and they need to file financial reports on a regular basis. These stocks are also under the close supervision of the SEC, the Securities and Exchange Commission.

You can trade penny stocks on both the pink slips and the OTCBB. The OTC Bulletin Board or OTCBB is an electronic system for securities that are not listed with one of the national stock exchanges. For companies to be listed here the only requirement they need to fill is that of filing financial reports to the SEC. If the company fails to do so then their listing is removed from the OTBB and they are only quoted in the Pink Sheets. The activities of the Pink Sheets are neither monitored nor regulated by the SEC.

A company does not need to file anything if they have less than 500 shareholders or less than $10 million of total assets.

As they are, penny stocks are wide open to manipulation and scams. As many of these companies are small their share prices are normally well under $5 and their capitalization is very low. Because of the lack of mandatory reporting that goes with penny stocks, it can be very hard for potential investors to get a hold of information about the company they want to buy shares in.

Many scammers can use this to their advantage by publishing misleading information to increase the price of their stocks. There is never very much trading happening with penny stocks because of the low number of shareholders and the low level of public interest. This means that just a few buy or sell orders can drastically change a stocks share price.

The biggest advantage of penny or micro-cap stocks is their low liquidity. Listed stocks are more stable and as such they can almost never take massive jumps in value, whereas penny stocks do that regularly. The low share price allows you to buy multiple shares in the company with very little money. So it is easy to see that a little change in price either up or down will have a big impact on the performance of your shares.

Low prices and high yields may be a draw for young rookie investors looking to make lots of money, but in actuality the fast paced high stakes market that surrounds the penny stocks is much more suited to experienced hands. Penny stocks are always high risk. Many of the investments will not work out as the company goes bankrupt. This will mean your share will end up worth nothing at all.

Because penny stock companies may have little or no working capital or assets or they may even still be in the development stages and it may be a while before the company sees any revenue. It is important that you remember that you might not be able to sell your shares for days or even weeks without a big discount because of the low liquidity.

by: Marsha Cheng

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