Typically, penny stocks trade takes place outside the major market exchanges. These stocks are highly speculative due to their low liquidity and restricted following and disclosure. Penny stocks popularly operate through pink sheets and the OTC Bulletin Board.
The SEC (Securities and Exchange Commission) implements all rules and regulations that govern the issuance and trading of all publicly trading companies as well as the brokers involved in trading stocks.
All traders that deal in penny stocks investments should warn their clients of the risks that are involved in trading penny stocks. These stocks are from small firms and are under $5. Traders and brokers are also required to show how much they are getting paid for trading penny stocks, to avoid any corruption.
As per SEC rules, it should also be made clear that penny stocks cannot be precisely priced and traded only occasionally. Although they offer high rewards, they come with a greater risk than all other stocks.
The penny stock trade has progressed with the changing marketing trends. Before the SEC modified their definition to include all shares that trade below $5, penny stocks are the stocks were traded for less than a dollar per share.
A large percentage of penny stocks trade does not take place on the major market exchanges. But, there are a few large corporations that trade less than $5 per share on major exchanges including NASDAQ, based on market capitalization.
Typically, a penny stock is a tiny company having highly speculative and illiquid shares which is subject to a few listing requirements with fewer regulatory standards.
Similar to other publicly traded stocks, a penny stock goes through a process referred to as an IPO or initial public offering. Initially, a company has to file a registration statement with the SEC to state that the offering is qualified to be excluded from registration. There are also many security laws that it must comply with the states that it intends to trade the stock.
Upon approval, the company initiates the soliciting process to get in touch with investors. Eventually, the company applies to get the stock listed on an exchange. It can also trade on the OTC.
Most commonly, start-ups and small companies issue stock to raise capital to develop their business. This procedure takes considerable time since it involves extensive paperwork. Moreover, it can also be costly.
One of the best ways for a start-up company to get hold of significant capital is by issuing stocks. Penny stocks are frequently the outcomes of such projects. They are both risky and lucrative for investors.
You should consider these stocks approximate investments. This reason is why the FINRA and the SEC have established specific and clear rules for regular authentic penny stocks trading. All broker-dealers must obey and fulfill the requirements of Section 15(h) of the SEC Act of 1934 to qualify for trading any penny stocks.
These policies help investors to identify and avoid fraudulent offers that lure investors to make huge investments. Many investors have suffered potential losses in hopes of getting instant rewards. Although the penny stocks spectrum ranges from instant profits to potential risk, the reality lies within these extremes.
One of the best things to do before plunging into penny stocks investments is to research as much as you can. Like all other investments, there is no success guaranteed in penny stocks if you do not possess patience and dedication.
Read advice from that come from only genuine investments gurus like Timothy Sykes and Warren Buffett. It also helps to learn the different parameters you should use for searching various stocks on screeners.
You can trade penny stocks on listing services, such as Pink Sheets and OTCBB. A large chunk of market movements, takes place after hours, both on the national public exchanges and on penny stock exchanges. Similar to investing in traditional public securities, an investor would buy these shares through a through a normal brokerage service.
After the exchanges close, penny stocks can experience volatile fluctuations after hours. In case penny stock investors buy or sell after hours, they may be able to purchase shares for very low prices and sell for very high prices.
Highly illiquid stocks that have only a few hundred dollars traded per day may experience tremendous volatility. Investors should be careful before investing money in these small companies. Moreover, when the time comes to sell these stocks, they prices may fall since there are not too many immediate buyers.
Investors must make sure that their stock holds adequate liquidity to last for an average price. They can also use limit orders to set an upper limit on the maximum share price.
Experts warn investors to purchase a stock that has negative earnings. Naturally, a company that is going through signals a red flag. If the P/E shows a “-“ sign, this means that the stock is going through a negative earning.
Moreover, do not hold your penny stocks forever. Investors come across miraculous success stories that promise to turn them into millionaires. However, it is better to do your research for knowing the best time to buy and sell your penny stocks.
Promoters continue to apply improved tactics to trick investors into making massive investments. Since a few of these scams are perfect, it is difficult to recognize the set-ups. Some of these tactics are not technically illegal but make use of only misleading information to trick you in.
While a few tech-savvy investors are less likely to fall victims to these scams, thousands of people are vulnerable to these subtle but fraudulent activities that attract investors with larger than life profits.
It is important that you don’t fall for a ‘pump and dump’ scheme. All illegal promotions and scams should be reported immediately to your state's securities regulator or the SEC.