What are Penny Stocks?

Penny stocks are usually not listed at the major stock exchanges like the NYSE or the NASDAQ because they don't meet the requirements to list. Stocks that are listed must have a minimum number of shareholders, minimum assets and file financial reports regularly. Big board NYSE and NASDAQ stocks undergo strong supervision from the SEC, (Securities and Exchange Commission).

For the most part penny stocks are usually traded on the OTCBB or on the Pink Sheets. The OTCBB (OTC Bulletin Board) is an electronic system for over-the-counter securities (stocks) that are not listed with one of the big board stock exchanges. The main requirement is that the companies file financial reports to the SEC. If not, the company will be removed from the OTCBB listing and the stock will be pushed to the Pink Sheets. The Pink Sheets activities are truly not supervised or regulated by the SEC, regardless of what they might want you to believe. SEC only gets involved with the Pink Sheets when one of their buddies call in for a favor (This will be discussed in a separate post).

If the company has less than $10 million in total assets or less than 500 shareholders in total then no filings must be completed.

Penny stocks are wide open to scams and manipulation. The stock price is usually far below $2 and market capitalization is very small. The lack of reporting requirements can make it difficult to find verified information about the company, its finances and their future outlook. When I’m trading the OTC Pink Sheets I’m looking at everything as a scam. Once I start to show gains of 20% I start to sell off shares until I at least cover my initial buy in.  Then I am holding free shares to see where it might take me.

Many fraudsters (SCAM Master CEO’s) 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 it doesn’t take many OTC traders to place buy or sell orders to have dramatic effect on the share price.

In my eyes the low liquidity is the biggest advantage of penny or micro-cap stocks. A big board listed stock almost never moves several hundred percent within a few days, whereas a penny stock can do that easily. 100 percent gainers happen daily trading the OTC Pink Sheets. The low stock price makes it very easy to acquire a large amount of shares with a small amount of cash.

The low stock prices and limited capital requirements often attract very novice traders but penny stocks are definitely a playing field for experienced investors only in my mind. Penny stocks are very high risk trades. Many companies won't probably succeed and go bankrupt. The shares will end up worthless.

Many penny stock companies have zero to limited working capital, assets or are in the developmental stages for years before any revenues can be expected. Trading penny stocks is a daily task, you cannot just buy and walk away.

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