We Know: What's a Penny Stock and Why, Why Not to Buy Them

What is a penny stock?

Penny stocks are speculative securities of very small companies, priced below $5, and generally trade over-the-counter, such as on the OTC Bulletin Board or in the Pink Sheets. Penny stocks may also trade on securities exchanges, including foreign securities exchanges. They include the securities of private companies with no active trading market.

How can I purchase penny stocks?

You must purchase penny stocks through a broker. Before a broker-dealer can sell a penny stock to you, SEC rules require the firm to first approve you, the customer, for the transaction and receive a written agreement to the transaction from you.

What are the brokerís responsibilities in selling penny stocks?

The firm must provide a document describing the risks of investing in penny stocks. The firm must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. The firm must also send regular account statements showing the market value of each penny stock held in the customerís account.

What is a current market quotation?

The current market quotation is the prevailing price at which a stock, bond, or commodity may be purchased or sold. This is based on the history and demand for the stock.

Will I be able to sell penny stocks once I own them?

Penny stocks may trade infrequently, which means that it may be difficult to sell them shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price.

How risky are penny stock investments?

Investors in penny stocks should be prepared for the possibility that they may lose their whole investment. Pressure to purchase penny stocks via email or other communication means, generally comes from people are looking to artificially inflate the prices of the stocks so they can sell. This will drive the price back down to where it started or lower.

Who should purchase penny stocks?

Only seasoned investors should purchase Penny stocks. No matter how luring penny stocks are to new investors because of the low price, they are often taken advantage of because of their lack of experience and investment business sense. New investors should also remember that the stockbroker is paid to sell the stock, not to make money for you.

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