Many people follow the stock market as a hobby. Some of them invest in “penny stocks,” which are stocks that are not listed on exchanges like the NYSE or NASDAQ. Instead they are listed on the pink sheets or the over the counter bulletin and trade for under $5 per share. Brokers do not generally recommend penny stocks because they are high risk. On rare occasions, however, they can produce great returns and the idea of striking it rich off of a long shot is sometimes too tempting to uninformed investors.
Why penny stocks are a risky investment
We want to look at the main reasons why penny stocks are a bad investment idea – for the first-time investor or the seasoned one.
- First, penny stocks are not sold by reputable companies (referred to as “blue chip”) with a well-established history. Most companies with these types of stocks are either newly-formed, or on the verge of bankruptcy.
- Second, penny stocks are largely illiquid. This means that it is very difficult to get rid of the shares once you purchase them.
- Third, because they are not listed on any SEC-controlled exchanges, they are not as regulated, are less transparent, and are more easily manipulated. All of this puts investors at risk.
In short, penny stocks are easy to buy but hard to sell, and the lack of oversight makes them hard to research. Still, your broker may recommend purchasing these products for your portfolio. If he or she does, keep this in mind: under the Securities Exchange Act of 1934, Section 15(h), your broker must:
- Inform you of any risks associated with the stocks
- Inform you of what kind of commission he/she or the firm will receive based on the purchase
- Inform you of the current market quotation (providing it is available) of the worth of the stock(s)
- Perform his or her due diligence before recommending any stock purchases
- Provide you with monthly statement so you can see how the stocks are performing
In other words, your broker or brokerage firm still owes you a duty to tell you the truth about the investment from the beginning.
If you sustain significant financial losses after purchasing penny stocks on your broker or brokerage firm’s advisement, you may be entitled to damages for that loss. The Frankowski Firm helps investors who have been harmed by negligent or incompetent advisors, brokers and brokerage firms. To learn more about our services, or to speak with an experienced investment fraud attorney, please call 888-741-7503, or fill out this contact form.