The term “penny stock”
generally refers to low-priced (below $5), speculative
securities of very small companies. While penny stocks
generally trade over-the-counter, such as on the
OTC Bulletin Board or in the
Pink
Sheets, they may also trade on securities exchanges,
including foreign securities exchanges. In addition,
penny stocks include the securities of certain private
companies with no active trading market.
Before a broker-dealer can sell a penny stock, SEC rules
require the firm to first approve the customer for the
transaction and receive from the customer a written
agreement to the transaction. The firm must
furnish the customer a document describing the risks
of investing in penny stocks. The firm must tell the
customer the current market quotation, if any, for the
penny stock and the compensation the firm and its broker
will receive for the trade. Finally, the firm must send
monthly account statements showing the market value of
each penny stock held in the customer’s account.
Penny stocks may trade infrequently, which means that it
may be difficult to sell penny stock shares once you own
them. Because it may be difficult to find quotations for
certain penny stocks, they may be impossible to
accurately price. Investors in penny stocks should be
prepared for the possibility that they may lose their
whole investment. For more information, read the penny stock rules
section of our
Broker-Dealer Registration Guide. You may also want
to review the penny stock rules (Securities
Exchange Act Rules 15g-1 through 15g-9).
Before you consider investing in the stock of any small
company, be sure to read our brochure,
Microcap Stock: A Guide for Investors.
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