Ethics in Selling Stocks for Very Low Prices
Investors call stocks worth less than $5 per share "penny stocks" and the penny stock market is ethically and sometimes literally bankrupt. Penny stocks generally come from small or poorly-managed companies and rarely trade on major exchanges. As a result, penny stocks escape the scrutiny and regulation that larger companies and traders deal with.
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Penny Stocks
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Small, speculative and nearly bankrupt companies often have shares with very low values. At the most basic level, the price of a share reflects investors' faith in the future profits of a company; shares selling for under $5 should be taken as a bad sign. In fact, the Securities and Exchange Commission (SEC) mandates that brokers send buyers a pamphlet on the dangers of investing in penny stocks every time brokers sell penny stocks.
Scams
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Penny stocks frequently fall victim to scams because the low levels of regulation, attention and total value of stock make them easy to manipulate. According to the investing website The Motley Fool, in a brazen show of unethical behavior major shareholders and even company executives sometimes pay an outside analyst or other professional to release a shining analysis or prediction of a company's profits and spam potential investors with it, artificially pushing up share prices. Whoever started the scam then dumps their shares, reaping artificially high profits and causing the value of the shares to crash.
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Regulations
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According to trader Michael Goode, the SEC regulations for penny stocks limit the ethical bankruptcy of the penny stock market, but not by much. Traders, analysts, brokers and other professionals cannot propagate false information about a company and profit from it (that's fraud) but they can make predictions that bend reality and spam millions of people with "Buy Now!" messages.
Ethics of Selling
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By requiring that brokers give buyers pamphlets about the dangers of penny stocks, the SEC tries to limit opportunities for brokers to take advantage of investors. According to The Motley Fool, many people still want to buy penny stocks even when their brokers try to dissuade them. If a buyer has been warned (the SEC website cautions that penny stock investors should be prepared to lose their entire investment) and has accurate information about a given company, it appears ethical to sell.
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References
- Photo Credit Stock Market Crash image by Paul Heasman from Fotolia.com
