A Complete Guide to Penny Stock Traders-All About Penny Stocks-OTC Stocks- Nasdaq




Penny stocks, also known as micro-cap stocks, nano-cap stocks, small cap stocks, or OTC stocks, are common shares of small public companies that initially trade at low prices per share. It is also a term for inexpensive stocks that subsequently become highly lucrative holdings.

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According to the U.S. Securities and Exchange Commission (SEC) the term "penny stock" generally refers to a security issued by a very small company that trades at less than $5 per share initially. Penny stocks generally are quoted over-the-counter, hence the name "OTC stocks". Over-the-counter exchanges that list penny stocks include, the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.). Penny stocks can also trade on securities exchanges, including foreign securities exchanges. Penny stocks can include the securities of certain private companies with no active trading market.



Prosecutors and the Federal Bureau of Investigation say that fraud is widespread in the penny stock market. Even though the penny stock companies are small, the scams that involve them can be for tens of millions of dollars.

In the case of many penny stocks, low market price inevitably leads to low market capitalization. Such stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks in the US are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets.
 
Another problem with the penny stock market is that it has little liquidity, so holders of shares in penny stock companies often find it difficult for them to cash out of positions.

In the United States, the SEC and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks. 


Concerns for investors

Many penny stocks, particularly those that trade for fractions of a cent, are thinly traded. They can become the target of stock promoters and manipulators.These manipulators first purchase large quantities of stock, then artificially inflate the share price through false and misleading positive statements. This is referred to as a "pump and dump" scheme. The pump and dump is a form of microcap stock fraud. 



In more sophisticated versions of the fraud, individuals or organizations buy millions of shares, then use newsletter websites, chat rooms, stock message boards, fake press releases, or e-mail blasts to drive up interest in the stock.Very often, the perpetrator will claim to have "inside" information about impending news to persuade the unwitting investor to quickly buy the shares. When buying pressure pushes the share price up, the rise in price entices more people to believe the hype and to buy shares as well. Eventually the manipulators doing the "pumping" end up "dumping," when they sell their holdings.
 
The expanding use of the Internet and personal communication devices has made penny stock scams easier to perpetrate.


Regulation

In the United States, regulators have defined a penny stock as a security that meets a number of specific standards. The criteria include price, market capitalization, and minimum shareholder equity. Securities traded on a national stock exchange, regardless of price, are exempt from regulatory designation as a penny stock, since it is thought that exchange-traded securities are less vulnerable to manipulation. Therefore, Citigroup (NYSE:C) and other NYSE-listed securities which traded below $1.00 during the market downturn of 2008–09, while properly regarded as "low-priced" securities, were not technically "penny stocks". 




Although penny stock trading in the United States is now primarily controlled through rules and regulations enforced by the SEC and FINRA, the genesis of this control is found in State securities law. The State of Georgia was the first state to codify a comprehensive penny stock securities law. Secretary of State Max Cleland, whose office enforced State securities laws, was a principal proponent of the legislation. Representative Chesley V. Morton, the only stockbroker in the Georgia General Assembly at the time, was principal sponsor of the bill in the House of Representatives. Georgia's penny stock law was subsequently challenged in court. However, the law was eventually upheld in U.S. District Court, and the statute became the template for laws enacted in other states. Shortly thereafter, both FINRA and the SEC enacted comprehensive revisions of their penny stock regulations. 
 
These regulations proved effective in either closing or greatly restricting broker/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks sector. Meyer Blinder was jailed for securities fraud in 1992, after the collapse of his firm. However, sanctions under these specific regulations lack an effective means to address pump and dump schemes perpetrated by unregistered groups and individuals.