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Penny Stocks info: Learn The Basics HERE

This  is designed to provide you, the beginning investor, with general information about penny stocks and the markets in which they are traded. Because there is so much fraud involving penny stocks, this booklet serves mostly to warn potential investors against becoming involved with penny stocks. However, you should be aware that many small, deserving, completely legitimate companies issue stock that trades for pennies a share in the over-the-counter market. The trick is to be able to spot the potential fraud. I hope this will help you do just that. If you take the time to read through this article you will learn: * What are penny stocks? * The “OTC” market * Principal/Agency * Bid/Ask * The spread * Mark-ups * Market makers * Manipulation * Initial public offerings * Legitimate penny stocks * Sources of information * Warning signs * Investigate before you invest What Are Penny Stocks? There’s no set, accepted definition of penny stock. Some folks outline it as stock priced under one greenback, some under 5 greenbacks. Some folks include only those instruments traded in the pink sheets, some include the complete OTC market. The Stocks Division considers a stock to be a penny stock if it trades at or under $5.00 per share and trades in either the pink sheets or on NDX . In addition, a real penny stock will have less than $4 million in net real assets and won’t have a serious operating history. ( to paraphrase, if a company has real assets,eg plant and inventory, and is engaged in some real business, for example producing, then the Division does not consider the stock to be penny stock though the shares are cheap. ) The OTC Penny stocks are not traded on a stock exchange market but are traded in the over the counter ( OTC ) market. Part of the OTC market is the NASDAQ State Market ( NNM ) of the Naz State ( organisation of Instruments Dealers Automated Quotation ) System, which does not include any penny stocks. There are non-NNM Naz stocks, including some penny stocks. The Naz system has listing standards that change from time to time and, depending on the standards, there might be more or less penny stocks on NDX . If you buy a reasonable security that is mentioned on NDX , it will meet certain minimum standards. In addition, many NDX costs are quoted continually in papers, permitting you to follow the cost of your security rather than driving you to depend on your broker for all price info. The 3rd major part of the OTC market is the nation’s Quotation Bureau’s ( NQB ) service, frequently called the pink sheets. The NQB’s stocks lists and price info, released on pads of long, narrow sheets of pink paper, have, for all practical purposes, no suggestive listing standards, and price info is often tricky, or even impossible, for the tiny financier to get. Broker-dealers get their price info by calling the trading desks of 3 market makers. Clearly , little speculators don’t have access to those traders and must depend on their broker for accurate price info. Principal / Agency In most instruments transactions, your broker-dealer acts as your agent, organizing an exchange at once between you and a 3rd party. In compensation for organizing that trade, you pay your broker-dealer a commission. In some examples, the broker-dealer has the safety you try to purchase in inventory, or wants the safety you want to sell. The broker-dealer may trade with you on its own behalf, as a principal in the exchange. When the broker-dealer acts as a principal, and not as an agent, the trade confirmation should say that on its face. The broker-dealer isn’t paid a commission in theory trades, but makes its money on the spread, and by purchasing and selling at advantageous times, the same as any other financier. A big portion of penny stock trades are principal transactions, and a stockholder should be cautious to the potential conflicts of such transactions. Bid / Ask Penny stocks do not each have a single price at which they are bought and sold, but a selection of different costs. The 1st difference is between the bid price and the ask cost. The bid price is how much somebody is prepared to pay for the safety, or the price at which you might sell your stock. The ask price is how much somebody will sell their instruments for, or how much you’ll have to pay. The difference between the costs is the spread. The spread To most financiers, the spread represents a built in loss at the time of investment. As an example, if you bought a stock that traded at half cent bid, one cent ask, the bid would more than double in price for you to get to break even ( the more than double comes from extra costs like ticket charges and other varied costs ). Many stockholders buy penny stocks believing that trading at twelve cents means they can buy and sell at twelve cents . This simply isn’t the case, and any salesman who uses such a phrase is only telling half the truth. The spreads in penny stocks are most commonly 25-33%, are sometimes 50-100% and often are over a hundred percent. Another factor to bear in mind when assessing price info about penny stocks is that there are 2 bid and 2 ask costs, the outside and inside bid and ask. As a rule, the price you may have an interest in will be the outside bid and ask, or the lower bid and the higher ask, as those are the bid and ask costs to public buyers. Mark-ups The last pricing factor concerning penny stocks is named the mark-up. A broker-dealer who has held the safety in its account and subject to the danger of market price fluctuation, may mark the cost of the safety it sells to you up by a certain p.c., on top of the spread. This is to compensate broker-dealers for maintaining inventory adequate to deliver requirement for an orderly and liquid market. What it implies to the average financier is another cost that creates an in-built loss at the time of investment. To explain, the instant your transaction is effected, your securities are worth less than you paid for them. While it is no guarantee of a good price, you are much more likely to get a better price in an agency exchange employing a broker-dealer that has no interest in the exchange, thanks to the pricing factors above. In the everyday penny stock transaction, the broker-dealer buys from its patrons at the bid and sells at the ask, capturing as compensation the spread, and any mark-up. Market maker is a broker-dealer who stands prepared to sell or buy one hundred shares of the stocks in which it makes for a market. When an exchange is suggested, the market maker will give a price at which it might be ready to effect that exchange. The market maker’s price applies only to the 1st one hundred shares. While the market maker system has been widely criticised ( of course, what proportion of a commitment is it to buy a hundred shares at a penny apiece? ) the system does offer speculators some level of fairness. The more market makers there are in a given stock, the more probable they are to bid against one another, and the price will more probably move to a real market cost. The names of the market makers of stocks traded in the pink sheets are listed in the pink sheets. Manipulation Particularly when there are few or just one market maker, penny stocks are at the mercy of price management. A standard and simple manipulation is for a broker-dealer to collect a giant holding of a penny stock at a particularly low cost. Thru the use of hi-pressure sales strategies, the sales force of the broker-dealer hypes the stock and stirs up demand, which apparently justifies the continuous rise in prices given by the broker-dealer ( which is also the sole market maker ). The price continues to rise till there are no more speculators who will buy, and then the bottom falls out and the price plunges. Infrequently the broker-dealer will buy back the stocks at the fallen costs to recapture the stockpile for a future revival of the stock ; more frequently backers are simply left holding the meaningless stock. 1st Public Offering The price and market consultation above relate to offerings penny stocks already trading in the market. Stocks are introduced into the market thru a preliminary public offering ( IPO ). Often , an IPO would have to be registered with the Stocks Division, which applies a group of suggestions to the offering to figure out whether the offering is fair, just and equitable. Though the merit system of applying those suggestions isn’t guaranteed, fake offerings are declined and not granted registration. Because of this, Missourians are not often victims of penny stock cons in an IPO, but lose their cash in the secondary market. In the secondary market, there are broad exemptions in the law that let many penny stocks to trade in Missouri without meeting the merit standards. Valid Penny Stocks Notwithstanding all of the issues with penny stocks and the uncountable millions of bucks of loss concerned with them, there are bonafide corporations whose securities trade in the pink sheets at extremely low prices. Fighting young companies only starting out are perfect examples. Investment in such a company, held thru the firm’s early years, can pay off well. Such a shrewd investment needs 3 things : the facility to select the right company, the capital to invest and hold the investment, and luck. In order to pick the right company, you’ve got to know something about the business in which the company engages. You have to be able to size up the viability of the organization’s business plan and the firm’s capability to challenge in its field of enterprise. You have to be able to judge the capability of the firm’s management to run the company. Ultimately , you have to be able to make an evaluation of the capitalization and money flow of the company. If you find the right company, you have to be in a position to hold the investment for years to permit the company to grown up and for the stock to increase in value. Investment in expansion corporations is long term investment. Similarly , you have to have adequate capital to be in a position to bear total loss of your investment. Investment in rising corporations is always a high-risk investment. Ultimately , there’s merely a part of luck in any stock investment. Luck plays an even larger role in a market in which manipulation is so prevalent. Some legit firms have had their stocks manipulated to such an extent that they were were forced into bankruptcy. Even without manipulation, the success or failure of a fledgling business is just unpredictable. Sources Of Info Your broker could be an amazing help in judging an investment. However, in the penny stock area, there are multiple devious brokers whose only goal is to sell. Be certain the recommendation you receive is balanced and addresses your investment wishes. When unsure, dodge a penny stock investment, particularly if your broker makes a speciality of penny stocks. The prospectus is the most complete source info about an IPO. It sets out where your investment cash will be used, describes the capitalization, history and management of the company and describes the money flow system of the company. If you want help translating the data you find in the prospectus, the Division has another leaflet in this series titled the way to Read a Prospectus. Trade confirmations contain a treasure house of info. The confirmation will show basic info, for example number of shares, but will also indicate whether the exchange was agency or principal, was solicited or unsolicited ( it’ll say unsolicited if you called your broker to set the order without your broker having tried in any way to get you to set the order ) and, in the case of most pink sheet and non-NASDAQ State Market trades, give the bid and ask at the time of execution of the exchange. Manuals like Moody’s and Standard and Poor’s have current monetary info about corporations, and most penny stocks are listed in the manuals. Regular reports filed with the U.S. SEC Commission have updated info about firms that register with the SEC. The commonest report is a 10-K Alert signs Watch for the following caution signs to warn you of a probable penny stock crime : Hi-pressure sales systems. Investment in a legitimized rising company is long term. A good small company isn’t going to skyrocket in 2 weeks. Building a sound company takes years ; you have got a few days or weeks to choose whether the investment is suitable for you. Blind pools and blank checks. Don’t invest in any security without being told precisely how your cash will be spent. Be certain you know which properties the company plans to buy with the offering proceeds and how much cash is to be spent on management and promoters. Mismarked trade confirmations or new account cards. Be extremely scared if your trade confirmation is marked unsolicited if your broker did, really, solicit the trade. While it could be an easy mistake, unfair penny stock brokers frequently mark the confirmation as unsolicited to bypass the registration laws and the fair, just and equitable standard. Watch for misstatements about your net worth, earnings and account objectives as well. Making an investment in penny stocks is hopeful business and involves a high level of risk. Constantly brokers will reinforce the new account card to make it appear that you are acceptable for a penny stock investment when you’re not. Unapproved transactions. Be cautious to placement in your account of stocks you didn’t agree to buy. In some examples, a broker may attempt to pressure you into purchasing the stock, saying that since you’ve got the stock, you must pay for it. In a number of cases, the broker is briefly parking the stocks in your account, maybe. To meet the minimum distribution of an IPO, or for any range of reasons. In a few cases, an unapproved trade is just a mistake, but and anyway, bitch right away, both verbally and in writing to your broker, your broker’s executive and to the Instruments Division. Analyze Before You Invest Millions of dollars are lost in the penny market yearly. Those few who earn cash in the market are essentially stockholders in bonafide, fledgling firms. Before you invest in any penny stock, read about the company. Don’t permit yourself to be coerced into a transaction that is not best for you. Try the broker-dealer, the salesman and the stock itself with the Division. If that sound too complicated for you, be sure to watch the video at the top of the page. They are currently offering an 8 week free trial of their penny picks newsletter. There is no obligation and it is free. You can watch the video or click Penny Stock Robot.