Penny stocks (sometimes called microcap stocks), are basically common shares of small public companies whose shares trade at low prices. In the United States, the Filing and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks. They define a penny stock as a security that trades below $5 per share and is unpublished on a national exchange, and also fails meet up with other specific criteria with regard to price, market capitalization, and minimum shareholder equity.
Out with a state definition others set the cut-off point for penny stocks at $3 or even as low as below $1. In your United Kingdom stocks priced at under 1 are called penny shares
In the case of many penny stocks the low monatary amount inevitably leads the low market capitalization. Such stocks can be highly volatile and susceptible to manipulation by stock promoters (see below) and pump and dump schemes (see below). These kind of stocks present a high risk for investors, whore often tempted through expectation of large and quick profits. Penny stocks in the USA are often traded over-the-counter (i.e. by telephone or computer as compared to on the floor of a stock exchange) on the Over-the-Counter Bulletin Board (OTCBB) (see below), or OTC Markets Group (OTCMG) (see below).
The OTCBB is an United States quotation medium used for many people over-the-counter equity securities that are unpublished on the NASDAQ or other national stock exchanges. Brokers/Dealers who subscribe to the system (which is not electronic) can make use of the OTCBB to enter orders for OTC securities. Based on the Securities and Exchange Commission (SEC) fraudsters often claim or imply that an OTCBB company is really a NASDAQ company to mislead investors into thinking that group is bigger compared.
The OTCBB once collected 100% of quotes, but that number has declined with the rise of its competitor OTC Markets (commonly known as the Pink Sheets) which uses an electronic quotation system. Companies quoted on the OTCBB, although ought to fully report as per all required SEC filings, have no market capitalization, minimum share price, corporate governance or certain other requirements mentioned. Companies which have been de-listed from stock exchanges for falling below such requirements often end up being quoted on the OTCBB.
Stock of non-reporting companies (those without current SEC filings) may be quoted in the Over-the-Counter Markets or Pink Sheets as they usually are known as. Most OTCBB companies are dually quoted, meaning they are quoted on both the OTCBB and the Pink Sheets. Stocks traded in the Pink Sheets are seen as lightly traded microcap/penny stocks, and both retail and institutional investors usually avoid them, because of fears that share prices are easily manipulated and therefore a potential for fraud exists.
OTC Markets established a categorization system to indicate the amount of financial and corporate disclosure provided with companies using its quotation system. Categorization is based on their own level and timeliness of a companys disclosure and most of the Pink Sheet categories can include both high quality and also speculative, troubled, or questionable companies. Investors are normally asked to use caution contemplating many of these types of for investment.
As a guide, the suffix OB in a stock-ticker listing signifies OTCBB while PK signifies Pink Sheet.
There are a number of reasons that shares (which are recognized as microcap stocks) definitely higher risk than regular stocks. Web sites ones are;
There is deficiencies in information available relating to companies which endure difficult to make an informed decision. There is also concern how the information that can be bought is not from credible sources.
They are not always traded on stock market trading. Because of this businesses do not end up being file with the SEC, meaning they are not subject to public scrutiny.
There is a lack of an historic data for these companies and many flip out considered to be either newly formed or approaching bankruptcy.
The companies have a low level of liquidity which may mean that a person with stock in these kinds of businesses may find it difficult to sell them. Low liquidity also means that some traders could buy large stages of the stock and then artificially hype it up then sell it to an unsuspecting investor. This can be known as pump and dump.
Unlike the majority of large well-established companies, many companies that issue penny stocks do not publish quarterly and annual reports which are available to the public. This lack of information about its operating history and financial position boosts the risk for an investor. The price of such stock can be based more close to aggressive marketing of the selling broker than on the real value of the company.
Microcap stock fraud is a way of securities fraud involving stocks of what are named as microcap companies which can be defined in in america as those along with a market capitalization of under $250 squillion. Many microcap stocks are penny stocks. Microcap stock fraud typically takes place among stocks which usually dont meet the requirements to be in your local stock exchanges plus they are therefore traded on your OTCBB and the Pink Sheets.
Pump and dump is a form of microcap stock fraud that involves artificially inflating the price of a companys stock through false and misleading positive statements, in order to sell the stock which was purchased cheaply at the next price. Once sold the overvalued shares price falls and investors lose their money. Stocks that are the subject of pump and dump schemes are sometimes called chop-stocks.
This strategy is frequently part of utilizes complex grand scheme of market manipulation on the targeted company. As an alternative to putting out legitimate information about a good the promoter sends out bogus e-mails (Pump) to an potential investors in an attempt to drive the price of the stock upwards. In some cases they utilize telemarketing or social as a to be able to promote these plots. After they accomplish their goal of artificially inflating the stock price, they quickly sell the shares (Dump) and the price usually then falls like a stone, taking all the sufferers money with this particular.
A stock promoter is basically somebody that promotes a stock, ultimately attempting to persuade others to purchase it so its share price promotes. Stock promoters used to have confidence in cold calling on prospective investors today mainly use the Internet, which offers up a much more appropriate method of promoting a stock with a wider audience. Usually, stock promoters promote penny stocks because of the difficulty in finding information on these companies as they are listed on the OTCBB or OTC Markets, which do not demand that companies provide as much financial information as other exchanges, such as NASDAQ or Nyse. Stock promotion is a generally illegal and fraudulent activity.
Some of the additional unscrupulous brokerage practices to be associated with include; bait and switch, unauthorized trading, and no net sales policies from which customers are unacceptable to, or are discouraged from, selling stocks
Penny stocks are not all bad, they are very high-risk investments that are unsuitable for all brokers. Some companies on the OTCBB and pink sheets are wonderful quality, and many are working particularly difficult to make their way onto the more reputable NASDAQ and NYSE. If may not resist the lure of these involving stocks, make sure you carry out comprehensive research and fully understand yourself getting into.
The Securities and Exchange Commission has published many warnings to investors about investing in penny stocks. Use the SEC website to look for a particular company to see whether there are any known problems with it.
If you recieve an email recommending a certain penny stock, examine the disclaimers to decide if the writer from the recommendation is being paid for their services. If they are, this can be a warning sign software program that stock. The good (or undervalued) stocks are usually kept secret by the professionals, not advertised in an unsolicited email. Whether its via an email, newsletter or social media always check the disclaimer.
If you plan to purchase shares it is strongly suggested that you limit any single purchase to no more than 5 percent of ones overall portfolio. That way even if performing take a loss, you should canrrrt you create invested more than your can manage to lose.
Whatever you trade in it is essential that no position can wipe your portfolio if your money crashes. Also setting a time to sell your stocks important. Some professional dealers suggest setting a limit of 50% profit and selling is a sensible margin. Others mention that if you create a 20% to 30% return in several days then sell the stock. Just dont end up being greedy.
In order to advance any stocks, it is best to have an easy way make transactions. Online brokerage accounts offer straightforward access to stocks. Although you will have to pay commission and annual fees these are usually minimal. Make confident that your online brokerage account gives the information that must about stocks straightforward you make the importance decisions.