Stocks or shares of a company are of many kinds. Two broad kinds of shares are equity shares and preference shares. The primary difference is that preference shareholders have a preferential right when it comes to dividend and liquidation. In fact, some of them may even get a fixed dividend depending on the company's policy.
Equity shares are bought and sold in trading facilities that are called stock exchanges. Also, the value of these shares may differ depending on the company's equity capital outlay, number of issued shares and demand and supply conditions of the shares at any given point of time.
Some of the shares trade outside formal stock exchanges. They trade in Over the Counter Bulletin Board (OTCBB) and Pink Sheets Securities. Also, these shares are normally priced less than $5 and the total market capitalization of the company (price of share multiplied by the number of shares) is less than $500 million. Such shares are called penny stocks.
There is one specific definition for penny stock mainly because each institution has a different definition and any company can move in and out of penny stock definition, depending on their financial and operational problems.
One of the distinguishing characteristics of penny stocks is their level of public disclosure. Penny stocks companies are not required to file any forms with the Securities and Exchange Commission (SEC).
Companies that trade in OTCBB have to follow certain rules and regulations whereas companies that trade on Pink Sheets need not disclose any information statutorily, not even those related to their financial results and operations. All this makes it harder to get any kind of information about these companies. This is the primary reason why many mainstream investors and institutional investors do not trade in penny stocks.
There are many frauds and scams related to penny stocks, Due to their low volume of trade and low value (typically less than $5), it is easy to manipulate these stocks. Many fraudsters boost the price and then do a massive sell off. As a result, other investors who buy these shares at a higher price will end up losing a lot of money, sometimes even the entire capital. So, investors must be wary while investing in these shares.
It is imperative for investors to do a comprehensive research on the prospective company before buying the shares. One should look into the soundness of the company's operations and its financial stability. Some of the factors to look into are the past performance of the company, its financial results, Form 10K and form 10q if available, the overall outlook of the company as well as the industry for the near future, the nature of products that the company is involved in and the expected levels of demand for such products, and the capabilities of the company's management.
Therefore, investors who invest in penny stocks must exercise extreme caution and will always have to be on the look out for manipulations and scams. This can make the difference between making and losing money in penny stocks.
Author Resource:-
Nir Dotan is a writer and promoter of
Penny Stocks services, and
Penny Stocks Preferred source for the latest news and information on the best and brightest Small Cap Stocks.
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