Firstly, penny stocks are stocks that are priced between 1 cent and $5 and they are traded via the Pink Sheets or the OTC Bulletin Board. These stocks can also be traded n foreign and other securities exchanges. However, when trading penny stocks you must be aware of the rules that apply to the trade of penny stocks.
The SEC or Securities and Exchange Commission has set out the rules that regulate the trade of penny stocks, these rules are as follows:
The brokerage house will need to obtain a written agreement regarding the transaction from their customer and their customer must be approved in order for the transaction to be able to take place.
Each brokerages firm must supply their customers with a document that outlines all the risk that come with trading penny stocks.
Consumers must be informed about whether there is a market quotation on the stocks they want to purchase and what that quotation is.
The consumer must also be aware of the commission charged by the brokerage firm on the trade.
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 penny stock rules include a Customer Protection Rule (Rule 15c3-3) that states that all the money you pay to the broker is in their control. 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 comes to the conclusion that there is more money on their hands than that which is owed to their customers or which has been paid from their customers then this money is put into a reserve bank account. This money is for the sloe purpose of being a benefit to 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 these rules set down be the SEC they can be the subject of SEC investigations which can lead to problem within the brokerage house. Learning these rules is a good idea for any new investor, this can help you to make sure that your broker is following the rules and helps you to make sure that your investments are not compromised.
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