Penny stocks get their name from their price range, each priced between 1 cent and $5 and they are traded through the Pink Sheets or the OTC Bulletin Board. These stocks are also traded through foreign and other securities exchange on a regular basis. When you begin to trade penny stocks there are certain rules that you will need to follow that are different from the rules the regulate trading stocks on the major exchanges.
The following rules have been set down by the SEC or the Securities and Exchange Commission and they pertain, specifically, to the trade of penny stocks.
The SEC needs the brokerage house to secure a written agreement with their client abut the transaction and their client must be in a position to complete this agreement.
The brokerage house must provide their customers with documentation outlining all the potential risks that are involved with penny stock trading.
Consumers must be informed about whether there is a market quotation on the stocks they want to purchase and what that quotation is.
The brokerage firm must also disclose to their customers what their commission will be for the trades.
The SEC requires that each brokerage house provides it’s customers with a monthly statement outlining the market value of each of their penny stocks.
The rules governing the trade of penny stocks were put in place to ensure that trades were fair and that investors knew about the risks before investing. These rules were set in place by the SEC to ensure that new investors knew what they were getting into and that they wouldn’t get in over their heads.
The control of monies paid to a broker for use for buying stocks in your name is in the brokers hands as outlined in Rule 15c3-3 or the Customer Protection Rule. Brokers will need to figure out on a regular basis how much of the money they are holding belongs to their customer or was gained via stocks owned by the customer. If the broker decides that there is more money on their books than what is owed to the customer or if the customer has over paid, the excess must be placed into a reserve bank account. The money in this account is for the sole benefit of the customers. This vital rule helps to stop brokerages from using their clients money to further their own business interests.
These rules are designed to protect all aspects of stock trading, the investors as well as the brokers and also the stock market. If a broker breaks any of the SEC’s rules that they will be the subject of SEC investigations and that can spell trouble for the brokerage house as well. learning these rules and making sure that your broker is following them means that you will know that your investments have not been compromised in any way.
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