Because they don’t meet listing requirements it is highly unlikely that you will ever see them at the major exchanges like NASDAQ or the New York Stock Exchange. Listed stock must meet certain requirements, such as: a minimum number of shareholders, minimum assets and filing of financial reports regularly. These stocks are also under the close supervision of the SEC, the Securities and Exchange Commission.
You will normally find the penny stocks on the OTCBB or on the pink slips. The OTC Bulletin Board is an electronic system that is specifically designed for the sale of over-the-counter securities, such as penny stocks, that are not listed on any national stock exchange. The only require is that the SEC receives financial reports from these companies. If the company fails to do so then their listing is removed from the OTBB and they are only quoted in the Pink Sheets. The activities of the Pink Sheets are neither monitored nor regulated by the SEC.
No filings need to be done for a company whose total assets are less than $10 million or if they have less than 500 shareholders.
As they are, penny stocks are wide open to manipulation and scams. As many of the companies in the penny stocks are very small, their capitalization is very small and their stock price is usually well below $5. The lack of reporting requirements on penny stocks can make it difficult for potential investors to any information about the company.
Many fraudsters will take advantage of this lack of reporting and publish misleading information to manipulate their stock prices. Because of a lack of public interest and small numbers of shareholders there is generally not very much trading going on. This means that just a few buy or sell orders can drastically change a stocks share price.
The low liquidity of penny or micro-cap stocks are their biggest advantage. Whilst a listed stock can never move in great leaps and bounds penny stocks go that often. The low share price allows you to buy multiple shares in the company with very little money. So it is easy to see that a little change in price either up or down will have a big impact on the performance of your shares.
With low share prices and no need for vast sums of money to start up penny stock trading might seem like the best place for rookies traders, but in reality it is a playing ground much more suited to the more experienced investors. Penny stocks are always high risk. Many of the investments will not work out as the company goes bankrupt. This will result in all the shares you bought being worth absolutely nothing.
Many penny stock companies have little or no working capital, assets or they are still in the development stages and it can be months or even years before they expect and revenue. Because of the low liquidity of penny stocks you may need to wait for days or even weeks before you can sell your shares without discounting them.