Penny Stock Trading Education
A penny stock trading education is critical to the success of anyone thinking about investing in this class of stock. These investments are potentially more risky than other stocks. Penny stocks are also known as micro-cap stocks. The Securities and Exchange Commission (SEC) defines a penny stock as any stock under $5 a share. Others place the cut-off at $3, while some investors classify them at $1 or less. In addition, stocks that are listed on the Pink Sheets or the over-the-counter bulletin board (OTCBB) are referred to as penny stocks.
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Significance
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Penny stocks have a reputation for being very risky compared with higher-priced stocks. Many investors buy them because they are basically ignored by many brokers and have the lure of the potential for that one stock to go from 20 cents a share to $40, or become the next Google. Conversely, micro stocks, or any stock for that matter, also have a good probability of becoming virtually worthless.
The typical penny stock trading education may be comprised of learning about various components that go beyond gaining knowledge and understanding about the mechanics of the penny stock trading process. Some areas that should be investigated include brokerage, Pink Sheets, OTCBB and the risks of this particular type of stock investment.
Brokers
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The importance of a penny stock education cannot be underestimated when it comes to choosing the right broker. Many times, the only information available about companies is what is contained in the organizations' prospectus. Therefore, conducting your own due diligence on a company is essential. Some brokers are more interested in moving penny stocks and have little concern for your financial welfare.
Just as there's a need to educate yourself about the company issuing a particular stock, the same due diligence should be undertaken when choosing a broker. Depending on the route you choose to buy and sell penny stocks, some brokers may or may not be subjected to the same rules and regulations.
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Pink Sheets
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Pink Sheets refer to a quotation service that specializes in gathering and publishing quotes for stocks that are not traded on the major stock exchanges, such as the New York Stock Exchange or American Stock Exchange. The assets, which include penny stocks, are traded through a network of dealers referred to as "market makers." Because Pink Sheets are a stock information service and not an exchange or broker-dealer, they are not required to be registered with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), which regulates securities firms conducting business in the United States. However, they do require broker/dealers to be registered. This ensures that you are dealing with a broker dedicated to certain professional conduct as well as federal and state regulations.
OTCBB
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Unlike Pink Sheets, OTCBB is a quotation service regulated by the SEC and FINRA. OTCBB provides live quotes, volume and other data regarding OTC financial instruments, which are not usually listed on the major exchanges. Only market makers are permitted to list stocks on OTCBB; they are not allowed to accept any payment or favors from companies seeking to list their equities on the board. The OTCBB was started as a stipulation of the Penny Stock Reform Act of 1990. This law obligated the SEC to form an automated trading system to meet certain conditions of the Exchange Act.
Risks
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Even if you have a strong penny stock trading education, some inherent risks in this asset class are difficult to overcome. One of the pitfalls is there may be very little research coverage compared with stocks listed on the major exchanges. Often, penny stock investors are often left to their own ingenuity to ferret out enough details about a company in order to make an informed decision. This includes meaningful information regarding the experience and track record of the organization's management team.
Tips
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Here are a few tips and questions that can enhance your penny stock trading education:
1) Keep in mind that companies are not required to file with the SEC unless they have 500 or more investors and a minimum of $10 million in assets.
2) Pay close attention to the background and skills of the company's management team. You should exercise due caution if an information technology manager is heading up a gold mining exploration firm.
3) Evaluate the financial health and resources of the organization. If the information is not available or is sketchy, this should raise a red flag.
4) Develop a clear understanding of what phase the company is in regarding the introduction of a new product, mining a mineral or developing a new drug. Is the product still in the development phase? Does it have a fully-functioning prototype? Is the mineral being excavated?
5) Find out if there are any ongoing state or federal investigations. Has the company been sued or is currently going through litigation?
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