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Encyclopedia > Penny stock

Penny stocks are common stocks that trade for less than $5 a share.[1] This article does not cite any references or sources. ...

Contents

Definition

In the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative. However, the official SEC definition[1] of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or NASDAQ) or an "over the counter" listing service, such as the OTCBB or Pink Sheets. The terms penny stocks, microcap stocks, small caps, and nano caps are also all sometimes used interchangeably, however per the SEC definition, penny stock status is determined by share price, not market capitalization or listing service. New York Stock Exchange (June 2003) The New York Stock Exchange (NYSE) is one of the largest stock exchanges in the world. ... NASDAQ in Times Square, New York City. ... The American Stock Exchange (AMEX) is an American stock exchange situated in New York. ... It has been suggested that this article or section be merged with pejoration. ... “Securities and Exchange Commission” redirects here. ... Market capitalization, or market cap, is a measurement of corporate or economic size equal to the stock price times the number of shares outstanding of a public company. ... The OTC Bulletin Board is a stock market for companies to list shares which either do not meet the capitalization, ownership, or other requirements of major stock exchanges, or for companies who do not choose to have their shares listed on such exchanges. ... Pink Sheets is an electronic system, published by Pink Sheets LLC, to display bid and ask quotation prices. ... Market capitalization, often abbreviated to market cap, is a business term that refers to the aggregate value of a firms outstanding common shares. ... Market capitalization, or market cap, is a measurement of corporate or economic size equal to the stock price times the number of shares outstanding of a public company. ... Market capitalization, or market cap, is a measurement of corporate or economic size equal to the stock price times the number of shares outstanding of a public company. ...


In the UK markets, penny stocks, or penny shares as they are more commonly called, generally refer to stocks and shares in small cap companies, defined as being companies with a market capitalization of less than £100 million and/or a share price of less than £1 with a bid/offer spread greater than 10%...[2] In the UK Penny Shares are covered by a standard regulatory risk warning issued by the Financial Services Authority(FSA)[3]


In France, penny stocks generally refer to risky stocks with a price of less than 1 euro.[1] “EUR” redirects here. ...


Penny stocks generally have market caps under $500M and are considered extremely speculative, particularly those that trade on low volumes over the counter. The Securities and Exchange commission warns that, "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."[4]


High-Risk Investments

Many new investors are lured to the appeal of penny stocks due to the low price and potential for rapid growth which may be as high as several hundred dollars in a few days. Similarly, severe loss can occur and many penny stocks lose all of their value in the long term. Accordingly, the SEC warns that penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud.[5]


Since a penny stock has fewer shareholders, it is less 'liquid', meaning it will not trade as many shares per day as a larger company. Any sudden change in demand or supply of stock can lead to a lot of volatility in the stock price. This lack of liquidity can send a stock price soaring up quickly or crashing down quickly. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation by management, market makers, or third parties. A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day. This can also make the stocks extremely difficult to short. In finance, short selling is selling something that one does not (yet) own. ...


Secondly, unlike NASDAQ or the NYSE, there are only minimal listing requirements for a stock to remain on the OTCBB, namely that they make their filings with the SEC on time.[6] In fact, companies that fail to meet minimum standards on one of the broader exchanges and are delisted often relist on the OTCBB or the Pink Sheets. The OTC Bulletin Board is a stock market for companies to list shares which either do not meet the capitalization, ownership, or other requirements of major stock exchanges, or for companies who do not choose to have their shares listed on such exchanges. ...


Furthermore, stocks trading on the Pink Sheets (recognizable with a .PK suffix) have little to no regulatory or listing requirements whatsoever, at least compared to major markets. There are no minimum accounting standards, change in notification of ownership of shares, and reported other material changes affecting the financial viability of a company, all of which are designed to protect shareholders.[7]


The SEC notes most the same about Internet message boards, where fraudsters claiming to be unbiased investors who've carefully done their due diligence may in fact be company insiders, and that a single person or a small team can create the appearance of a huge interest in a stock simply by creating a huge number of aliases, while banning the most vocal or perceptive critics of these offerings.


Penny Stock Fraud

Main article: Microcap stock fraud Microcap stock fraud, also known as microcap fraud, is a form of securities fraud involving stocks of microcap companies, generally defined as having a market capitalization of under $250 million. ...


The reason for all this relentless promotion of penny stocks is because of the profits to be made through illegal pump and dump schemes. The SEC[8] explains how it works: The night singer of shares sold stock on the streets during the South Sea Bubble. ...


"A company's web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest "hot" stock. Messages in chat rooms and bulletin board postings may urge you to buy the stock quickly or to sell before the price goes down. Or you may even hear the company mentioned by a radio or TV analyst. Unwitting investors then purchase the stock in droves, creating high demand and pumping up the price. But when the fraudsters behind the scheme sell their shares at the peak and stop hyping the stock, the price plummets, and investors lose their money. Fraudsters frequently use this ploy with small, thinly traded companies because it's easier to manipulate a stock when there's little or no information available about the company."


There are all sorts of variations of the classic pump and dump, from short-and-distort to selling chop stocks — the last being a scam in which shares are acquired for pennies under Regulation S and then illegally sold to overseas or domestic retail investors.[9] Other features of the typical penny stock scam include spam e-mails[10] and junk faxes[11] that tout ludicrous and fraudulent claims, crooked newsletter writers who promote a stock for a fee,[12] message boards swarming with "buy now!!!" postings about a stock from anonymous, paid posters,[13] fake or misleading press releases issued by the company,[14] or boiler rooms full of cold-callers targeting naive, elderly, or foreign buyers[15] all in attempt to drive up the share price while the insiders sell.[16] The night singer of shares sold stock on the streets during the South Sea Bubble. ... A Short and Distort scam involves short selling a stock while smearing a company with rumors to drive the stocks price down. ... A chop stock is an equity, usually trading trading on the OTCBB or Pink Sheets listing services, that is sold by unscrupulous stock brokers to unsuspecting retail customers at a considerable commission, often as high as 50%. The penny stock being promoted typically has few financial prospects and a large... It has been suggested that this article or section be merged with Securities Act of 1933. ...


A more recent outbreak of penny stock fraud is far more brazen, and is based mostly overseas.[17] Organized crime gangs in Eastern Europe and Asia will acquire a large number of shares of a moribund penny stock. Then, using passwords and logins to electronic brokerages, such as E*Trade, stolen at public computer terminals in hotels and elsewhere, they will then use the hijacked customer accounts to buy up shares, while at the same time selling their own shares, draining the customer accounts and leaving their victims holding thousands of shares of worthless penny stocks.


While not all stocks listed on the Pink Sheets or the OTCBB are fraudulent, one Business Week article estimated that chop stocks alone "make up perhaps half the 85 million-share daily volume of the OTC Bulletin Board."[18] A chop stock is an equity, usually trading trading on the OTCBB or Pink Sheets listing services, that is sold by unscrupulous stock brokers to unsuspecting retail customers at a considerable commission, often as high as 50%. The penny stock being promoted typically has few financial prospects and a large...


Internet spams

Almost any Internet user [citation needed] with an e-mail address will have been exposed to penny stock promotions through e-mail spam. Approximately fifty-five billion unsolicited "spam" e-mail messages are sent each day, a significant proportion of which tout penny stocks, usually as part of a pump and dump scheme. According to a study conducted at Oxford,[19] 15% of all spam was related to penny stock fraud. According to the study, "People who respond to the "pump and dump" scam can lose 8% of their investment in two days. Conversely, the spammers who buy low-priced stock before sending the e-mails, typically see a return of between 4.9% and 6% when they sell." E-mail spam, also known as bulk or junk e-mail is a subset of spam that involves sending nearly identical messages to numerous recipients by e-mail. ... The night singer of shares sold stock on the streets during the South Sea Bubble. ...


References

  1. ^ a b SEC (2006-02-02). Penny Stock Rules. U.S. Securities and Exchange Commission. Retrieved on 2006-07-12.
  2. ^ Pennysharesonline.com (2006-06-06). What Are Penny Shares. Retrieved on 2006-08-09.
  3. ^ cityequities.com (2005-03-16). Standard Regulatory Risk Warning for Penny Shares. Retrieved on 2006-08-09.
  4. ^ SEC (2005-08-02). Penny Stock Rules. U.S. Securities and Exchange Commission (Emphasis in the original). Retrieved on 2006-06-15.
  5. ^ SEC (2006-02-02). Microcap Stock: A Guide for Investors. U.S. Securities and Exchange Commission. Retrieved on 2006-06-15.
  6. ^ Investopedia (2005-09-05). The Lowdown on Penny Stocks. Investopedia. Retrieved on 2006-07-12.
  7. ^ Investopedia (2005-09-05). The Lowdown on Penny Stocks. Investopedia. Retrieved on 2006-07-12.
  8. ^ SEC (2005-01-11). Pump&Dump.con. U.S. Securities and Exchange Commission. Retrieved on 2006-11-21.
  9. ^ Gary Weiss. "Investors Beware", Business Week, 1997-12-15. Retrieved on 2006-06-15. 
  10. ^ NASD (2005-09-05). Stock Spams and Scams. National Association of Securities Dealers. Retrieved on 2006-06-15.
  11. ^ Junkfax.org (2006-03-29). Anatomy of a Stock Fraud. Junkfax.org. Retrieved on 2006-06-15.
  12. ^ SEC (2005-04-25). How to Avoid Internet Investment Scams. U.S. Securities and Exchange Commission. Retrieved on 2006-06-15.
  13. ^ Harry Domash. "Internet Makes Stock Scams Easy", San Francisco Chronicle, 2000-6-12. Retrieved on 2006-06-15. 
  14. ^ Assistant United States Attorney Carl Moor (2000-09-20). Emulex Hoaxer Indicted For Using Bogus Press Release. U.S. Department of Justice. Retrieved on 2006-06-15.
  15. ^ Attorney General Eliot Spitzer (2000-09-27). BROKERS IN $3.2 MILLION LONG ISLAND BOILER ROOM STOCK SCAM CASE SENTENCED. Office of the New York State Attorney General. Retrieved on 2006-06-15.
  16. ^ Wisegeek.com (2006-06-15). What is Penny Stock Fraud?. Wisegeek.com. Retrieved on 2006-06-15.
  17. ^ Ellen Nakashima. "Hackers Zero In on Online Brokerage Accounts", Washington Post, 2000-10-26. Retrieved on 2006-11-21. 
  18. ^ Gary Weiss. "Investors Beware", Business Week, 1997-12-15. Retrieved on 2006-06-15. 
  19. ^ BBC News (2006-08-05). Spammers Manipulate Stock Market. BBC News. Retrieved on 2006-11-20.

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External links


  Results from FactBites:
 
Penny stock - Wikipedia, the free encyclopedia (784 words)
The terms penny stocks, microcap stocks, small caps, and nano caps are also all sometimes used interchangeably, although market capitalization is not a good definition of whether an equity should be termed a penny stock.
Penny stocks are considered high risk investments and new investors should be aware of the risks involved.
Penny stocks are often used in a number of fraudulent schemes, from pump and dump, short-and-distort, and selling chop stocks -- issues acquired for pennies under Regulation S and then illegally sold to retail investors.
Penny Stock Mentality (632 words)
Of course, the stock slips from 9¢ to 6¢ but that is of little consequence--he knows he's gotten in near the bottom and nobody hits the exact bottom anyway.
The stock has a 5 for one reverse split and he celebrates the fact that he sold his remaining little stake at a 75% loss instead of the 95% loss that would happen just a week later.
He buys a 2¢ stock because he knows that the shell alone of any penny stock is worth 2¢ a share for companies trying to avoid the hassle of starting a corporation from scratch.
  More results at FactBites »


 

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