What are Penny Stocks?

//What are Penny Stocks?

What are Penny Stocks?

Penny stocks  are common shares of small public companies that trade that trades below $5 per share in the United States.

The SEC defines a penny stock as a security that trades below $5 per share, is not listed on a national exchange, and fails to meet other specific criteria.

In UK stocks priced under £1 are called penny shares. Low market price inevitably leads to low market capitalization.

Penny stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits.
Penny stocks in the USA are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets.

In the United States, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.

 
Many penny stocks, particularly those that trade for fractions of a cent, are thinly traded. They can become the target of stock promoters and manipulators.

These manipulators first purchase large quantities of stock, then artificially inflate the share price through false and misleading positive statements. This is referred to as a “pump and dump” scheme.
Such stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits.
Penny stocks in the USA are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets.

In the United States, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.

 

How Pump and Dump Schemes Work Market Manipulation
Many penny stocks, particularly those that trade for fractions of a cent, are thinly traded. Easy target for “Pump and dump” schemes stock promoters and manipulators, who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create.

Once they “dump” their shares and stop pumping the stock, the price typically falls, and investors lose their money.

Pump and dump manipulators first purchase large quantities of stock, then artificially inflate the share price through false and misleading positive statements. This is referred to as a “pump and dump” scheme.

 

The pump and dump is a form of microcap stock fraud. In more sophisticated versions of the fraud, individuals or organizations buy millions of shares, then use newsletter websites, chat rooms, stock message boards, fake press releases, or e-mail blasts to drive up interest in the stock.

Very often, the perpetrator will claim to have “inside” information about impending news to persuade the unwitting investor to quickly buy the shares.
When buying pressure pushes the share price up, the rise in price entices more people to believe the hype and to buy shares as well.
Eventually the manipulators doing the “pumping” end up “dumping” when they sell their holdings.
The expanding use of the Internet and personal communication devices has made penny stock scams easier to perpetrate.

 

 

2014-02-06T14:28:53+00:00

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