Penny stocks are usually not listed at the major stock exchanges like the New York Stock Exchange (NYSE) or the NASDAQ because they don’t meet the listing requirements. Listed stocks must have a minimum number of shareholders, minimum assets and file financial reports regularly. They are also under the strong supervision of the SEC, the Securities and Exchange Commission.
Penny stocks are usually traded on the OTCBB or on the Pink Sheets. The OTCBB (OTC Bulletin Board) is an electronic quotation system for over-the-counter securities that are not listed with one of the national stock exchanges. The only requirement is that the companies file financial reports to the SEC. If not, the company is removed from the OTCBB listing and the stock can only be quoted on the Pink Sheets. The Pink Sheets activities are not supervised or regulated by the SEC.
If the company has less than $10 million in total assets or less than 500 shareholders in total then no filings must be done at all.
Penny stocks are for these reasons wide open to scams and manipulation. The stock price is usually far below $5 and market capitalization is very small as the companies itself are very small. The lack of reporting requirements can make it difficult to find verified information about the company, its financial situation and outlook.
Many fraudsters take advantage of this and publish misleading information to manipulate the stock price. Because of the lack of public interest and low number of shareholders the trading volume is generally low. This means that a few buy or sell orders can have dramatic effect on the share price.
The low liquidity is at the same time the biggest advantage of penny or micro-cap stocks. While a listed stock can almost never move several hundred percent within a few days, a penny stock can do that easily. The low share price makes it possible to acquire a big amount of shares with a small amount of money. Little price increases or decreases have therefore big impact on the performance.
The low stock prices and limited capital requirements often attract novice traders but penny stocks are definitely a playing field for experienced investors only. Penny stocks are high risk investments. Many companies won’t probably succeed and go bankrupt. The shares will end up worthless.
Many penny stock companies have no or very limited working capital, assets or are in development stage for months or years before any revenues can be expected. Be aware that you probably can’t sell your shares for days or weeks or only at a big discount because of the limited liquidity.