- Penny stocks are usually defined as companies whose shares are trading for under $1.00 per share. The Securities and Exchange Commission expands the definition to stocks under $5.00 trading on the OTC Bulletin Board or in the Pink Sheets. Typically, penny stocks are companies withoutout the value or financial strength to qualify for listing on a regular stock exchange. The lure of penny stocks is the possibility of buying 100,000 shares of some no-name company for a nickel a share then see the share value skyrocket to $10 per share, turning a $500 investment into a million bucks.
Lack of Financial Information
- Stocks that trade in the pink sheets or over-the-counter are not subject to the same reporting requirements as exchange listed stocks. Penny stock companies are still required to file documents with the SEC, but the reports are less detailed and more difficult to find. Before investing in any penny stock. All SEC required filings are available on the EDGAR database. SEC EDGAR information is linked below. Many penny stocks are sold on the promise of future revenues and earnings while currently the company is not much of a business.
Internet and Email Scams
- Hot penny stock tips through junk email or online bulletin boards are often sources of penny stock fraud. The SEC says to "never, ever" make an investment based just on an Internet or email tip. Those who are pushing the stock may be insiders or large stockholders looking to unload their shares on unsuspecting investors.
High-Pressure Sales Tactics
- There are dishonest brokers who set up "boiler rooms" that contact investors over the phone and use high-pressure sales tactics to unload penny stocks. These companies buy the shares at a lower price than where it is sold to investors and do not care of the investor loses all of their investment. Never buy stock over the phone without first researching the company. If a telephone salesperson is pushing for an immediate decision to buy or miss the opportunity, pass up on the opportunity to lose some money.
- A penny stock may have relatively few shares outstanding and low trading volume, making it relatively easy for unscrupulous brokers or insiders to manipulate the share prices. The price may go up as the insiders unload stock on unsuspecting investors, then the bottom falls out of the price when the company behind the stock turns out to be not much of a business. The SEC recommends checking with state and federal regulators about disciplinary actions against company insiders.