The penny stocks are traded mostly outside the stock exchanges such as NYSE or NASDAQ. There are various risks associated with these stocks and if you are looking for an investment in them, you are advised to know the risks.
Although there is some risk associated with every investment in financial markets, this kind of stock is a good option for investment if you have some disposable cash, as there is a small amount at risk.
Broker or dealers trade them and it is better to understand the financial terms associated with this type of investment. I would like to add that if you are looking at some for investment, you should learn more about this kind of investment. You can find the relevant information about the subject in newsletters and message boards.
Stock Trading: Penny stocks are very speculative and have a market capitalization of around 500 million. They are traded over the counter and the trading is governed by SEC rules and guidelines.
U.S Securities and Exchange Commission have laid down some rules for investing and trading in them and a beginner should keep these rules in mind before buying or trading.
SEC Rules on Penny Stocks: Broker-dealer registration compliance is must before buying or trading any penny stocks. A broker or dealer should get a written request and thereafter should approve the investor.
SEC further rules that a customer desirous to purchase a penny stock should be provided a document mentioning the risk involved. The broker or dealer should also inform the customer the current market rate of the stock and the commission that will be charged by the broker.
The provisions made in the appropriate sections also put a mandatory requirement of providing monthly statements to the investor showing rates of each penny stock held by the investor in his account.
Sometimes the other terms such as small caps and microcap are also used for these companies and The United States Securities and Exchange Commission has defined them as a low-priced below $5.0 speculative securities of very small companies.
Many small companies have low assets and offer the stocks at very low price. These low price stocks are traded over the counter generally in low volumes.
These are generally quoted on over the counter systems such as the Over The Counter Bulletin Board (OTCBB) or pink sheets including foreign exchanges. The Securities and Exchange Commission strictly adheres that they are low priced speculative stock and the term penny stock does not relate to market capitalization or it’s trading at the exchanges (NYSE, NASDAQ) or over the counter.
Penny stock’s definition by the Securities and Exchange commission is strictly on the basis of its value and it does not depend on other parameters such as the company’s market capitalization or its listing. Investors should evaluate the risk factors before investing in them.