In the U.S.A., penny stocks are referred to as those stocks that are not traded on any of the major exchanges (AMEX, NASDAQ, NYSE). It is a low-priced, speculative security from a small company usually traded by an "over the counter" listing service or initial public offerings (IBO), such as (OTCBB, Pink Sheets) The beginner penny stock investor may find other terms used that are interchangeable with "penny stock", they are: microcap stocks, nano caps and small caps.
Penny stocks are a high-risk investment and beginner penny stock investors should be prepared to lose their entire investment. Penny stocks are usually capped under $500M and are speculative in nature especially those that are traded under low volumes in "over the counter" listings. The Securities and Exchange commission puts out a warning to those who wish to trade in Penny stocks that "Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them." Penny stocks can also be difficult to get accurate pricing on.
Why would the beginner penny stock investor find penny stocks attractive? They have low purchase prices and have potential for rapid growth that may be seen in just a few days. The risks involved to the penny stock investor are that of limited liquidity, the lack of adequate financial reporting and the fraud that is rampant in this investing field. Investor beware is an apt expression or warning for the beginner penny stock investor.
The OTC BB (OTC Bulletin Board) is a regulated quotation service in the U.S.A. owned by the NASD, for stocks that are not listed on any of the major U.S. stock exchanges. It can be difficult to distinguish between OTC shares and penny stocks. Many shares that do not meet the capitalization requirements of the major stock exchanges end up on the OTCBB which is why you may find the shares of smaller companies or those who are (IBO) being traded here including penny stocks.
Fraud and the Penny Stock
Quick growth potential makes the penny stock prime target for fraud in the form of illegal pump and dump schemes, short-and-distort, and chop stocks. The beginner penny stock investor will need to be aware that fraud is rampant in the form of emails in which stocks are acquired for pennies using Regulation S and then illegally sold to overseas or even domestic retail investors, according to Gary Weiss of "Investors Beware", Business Week (1997).
Summing all this up, beware the lure of quick money by the penny stock hustlers. The only ones making any money are those who have sold these types of stock. If you do invest be cautious, be prudent and always do as much due diligence as possible. One of the best suggestions that I have heard when approached by purveyors of penny stocks is to run not walk away, Invest in recognized firms that are either NASDAQ ,AMEX or NYSE. For these stocks you can usually believe what you are reading.
