Before Investing in Penny Stocks

Penny Stocks, small caps, micro caps and nano caps are terms often interchangeable, relating to stocks traded under five dollars a share. Stocks referenced to any of these terms, each has market capitalization, which refers to the total number of shares outstanding of company’s stock multiplied by the value per share. The total amount is the market capitalization for the value of the company. Small Cap stocks are companies that are traded and each has a market capitalization under two billion dollars. Micro Caps have market capitalization under $500 million and Nano Caps have market capitalization under $50 Million. Penny stocks are listed the Pink Sheet, do not have the minimum criteria for capitalization and the number of shares required to be listed on NASDAQ (Established in 1971, National Association of Securities Dealers) and OTC (Over-the-counter bulletin board – Stocks that are traded via a dealer network, which refers to broker-dealers negotiate directly with one another over computer networks or by phone, regarding the purchase and sale of these stocks, contrary to a centralized exchange). Web sites that provide resourceful information regarding penny stocks is PinkSheetstock.com, and other listed sites found on Internet search engines. Having a brokerage account, can buy, sell or trade any penny stock. The Securities and Exchange Commission, require financial institutions or brokerage firms to provide their clients with documentation, describing the risks of investing in penny stocks. Also, customers must receive a monthly account statement showing the market value of each penny stock held in their account.

Penny stocks listed on pink sheets have advantages and disadvantages. Advantages: Many more shares can be purchased compared to those stocks trading above one dollar or more, for the same total amount invested. Actually, a few hundred dollars or less, can purchased hundreds, thousands or ten’s of thousands of shares, of cheaply priced stock. Sometimes purchasing these very cheap or low price company stocks, may emerge into a more valuable company, and eventually meet the requirements to be listed on NASDAQ. The volatility, speculation and rumors, may greatly influence the daily, weekly or monthly trading of a penny stock. Because of these many factors, day traders can buy and sell, a company shares, in a day, and make a profit. Disadvantages: Many penny stocks traded have a large price difference or spread, between the “Bid Price” (The price an investor pays for a share of stock) and “Asking Price,” (The price a seller is willing to accept for the sale of shares of a company stock) because of the few number of shares maybe traded or hardly ever traded, during the day. The difference between both of these prices, makes it harder to sell at a profit, and requires the stock prices to appreciate in value substantially more, in order take a profit. Also, if the liquid for the stock does not exist or is low, the investor’s only choose upon selling the stock by lowering the asking price or taking a loss. Brokers or financial institutions tend to charge more commission for penny stock trades. Information regarding the financial records of these companies, which are represented, as penny stocks are harder to locate obtain, outdated, information is prone to fraud or misrepresented. Most brokers or financial advisors do not provide any information regarding their opinion on purchasing or selling penny stocks. Often these stocks are more speculative and have the greatest amount of risk for investing. Statistically, seventy-five percent of penny stock companies, trading under five dollars a share, will file for bankruptcy over ten year period, making their stock valuation almost or at least worthless. According to PinkSheets.com, in 2005 at least 4,781 companies were listed on the Pink Sheets (Most penny stocks are listed), with a market value at least $47.4 billion.

Those interested investing in penny stocks, should be cautionary of those brokers or scam artists, which use high pressure sales techniques, false advertising, and do not encourage investors to check out penny stock investments carefully, through their use of telephone calls, mail solicitation, E-mails, and instant messages on cell phones. These unscrupulous brokers, may not be licensed, provide false representation of a companies financial information or may try lure investors to buy an IPO (Initial public Offerings) penny stocks, by promoting a false advertisement or words of encouragement. Also, trying to sell penny stocks through any of these brokers, would be impossible or unreliable. Often, these brokers become “unavailable” to answer any calls, from those wanting to sell. Through these techniques, a dishonest broker will try to pump up the price of the stock, and then dump the shares, currently owned to make a profit. Also, similar technique adopted by scrupulous newsletter writers (online or mail) or those in chat rooms by providing false information, for prospective investors, by luring them into purchasing penny stocks. Millions of dollars are lost in the penny stock market each year. Unfortunately, the Securities and Exchange Commission, which regulates and enforces securities laws, has no over sight over Pink Sheet listing of stocks, because their jurisdiction only covers companies with more than ten million dollars in assets and more than five hundred shareholders of a public traded company. Almost all stocks traded on the Pink Sheets are not within their jurisdiction. However, extreme cases of antifraud provisions, certainly captures the radar detection for criminal prosecution of the Securities and Exchange Commission (SEC). In 2004, SEC did pursue prosecution against various brokers, which pumped up the price of some penny stocks or provided false research information, which got investors to purchase those penny stocks, then where sold by those brokers, which already had purchased those shares.

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