Penny Stocks: Reducing your risk

Penny Stocks, as defined by the SEC, are stocks with a trade price under $5.00, though many investors and investing groups see them as anything under $1.00.

You can find them 3 areas:

NASDAQ Small Cap or the New York Stock Exchange (NYSE) Stocks are strictly regulated by both the SEC and the listing Exchange and trade below $5.00. The Exchanges require a track record of trading above $1.00 or face delisting. A delisted Penny Stock has an “E” or 5th letter attached to the trade name, usually at the end.

Over the Counter Bulletin Board (OTCBB) or (OTC) Stocks are also regulated by the SEC but carry a much higher degree of risk. Note: all penny stocks are considered very risky. Analysts consider 95%-98% of them junk.

Pink Sheet Stocks are, in a word, dangerous since they are not regulated by anyone.

Research and due diligence is a good investing practice prior to making any investment, but in this case, where there is more risk, it’s absolutely crucial. NASDAQ Small Cap and NYSE stocks are required to file regularly with the SEC and their Exchange – get these reports and study them. Get to know the company well. Read their business plan and press releases and evaluate the stock's trading volume: low volume = little interest. Also consider using a reputable service with an open and verifiable track record for research assistance.







Make sure to avoid stocks that:

* Have an “E” (or 5th letter) attached to their name
* Have a poor reporting history
* Are in bankruptcy
* Are listed on the Pink Sheets
* Do not have an office in the country where they are listed
* Are trading in fraction of cents ($0.006)
* Are spending more than they’re making.

Also never invest in stocks which are touted in unsolicited phone calls, e-mails, faxes, ‘free’ newsletters, or on any website that does not have a verifiable track record.

When investing, don’t purchase just one stock. Set a maximum investment under $3,000 and/or buy blocks of 1,000 to eliminate extra commission fees.

Lastly: Never invest money needed for rent/mortgage, food or bills!

The risks associated with Penny Stocks are great, however, there can also be substantial rewards for those risks. It won’t happen overnight, and you must expect losses before any of those gains ever kick-in.

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