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surrounding them and focus on what our parameters are. The Securities and Exchange Commission requires all broker/dealers to obtain written acknowledgment from potential penny stock traders that they understand the risks associated with buying and selling low priced shares. Most Brokers go ahead and obtain this signature when any customer opens an account whether or not they plan on trading low priced shares; therefore they do not have to keep a running list of Penny Stocks as defined by the SEC which would change on a second to second basis. This definition, although somewhat complex, essential states that any stock not on a Major Stock Exchange or any stock that is under five dollars per share is considered a Penny Stock. Although we are not registered Broker/Dealers, we do recommend that anyone interested in Micro Cap Stocks should read this disclosure from the SEC known as Schedule 15G. Much of the information and advice in this document is grossly outdated, but just as much of it will always be epic and very useful. If we simply went by the SEC’s definition of a penny stock for our purposes, we would have a watch list of approximately 5-6000 stocks in the United States alone, which is close to half of all tradable securities of any size and price. By sticking to stocks under one dollar, not only do we narrow this list a little bit, but we also increase the exponential possibilities for our trading style. With increased possibilities comes increased risk, which is why we typically do not include stocks under a Penny. Rules and regulations for Bulletin Board and Pink Sheet Stocks allow Market Makers to advertise prices in increments as low as 1/100th of a Penny, which also means that stocks can and do trade all the way down to as low as $.0001. It may be hard to fathom how a stock could trade for a price that does not even exist in the real world, but when we think of buying a large amount of shares for a small amount of Dollars, it begins to make more sense. The fact is, many of these sub-penny issues are dangerous and have millions and even billions of shares available for public consumption. Administration of a reverse split, an act by which companies will give you fewer shares for the shares you own at a higher price, will eventual occur for 90% of all stocks currently trading below a penny. We do experiment with the occasional sub penny issue with very short time frames and with a very small amount of capital, and ultimately, we never trade a stock below the price of $.001. Sticking to stocks below a buck and above $.001 narrows the playing field a bit, but we have several additional criteria for our general screening process. First of all, stocks trading on a major Exchange such as the NASDAQ or NYSE that are priced under one dollar are typically out. Our major reason for this is that these exchanges have a very simple rule that stocks cannot remain on their venue if they are in this price range, and a delisting and subsequent exodus by investors can and does happen. The AMEX and NASDAQ Small Cap exchanges cater to smaller companies, and have slightly more lax rules, but there are definitely better places to look for tiny emerging growth companies. If you are looking for the next Enron or WorldCom, stocks under a dollar on the NASDAQ and NYSE would be the best place to start your hunt as fallen Giants and companies on the verge of bankruptcy typical lie within this particular framework. Unlisted stocks, or stocks quoted on the Over the Counter Bulletin Board (OTC BB) or the Pink Sheets tend to be more of the exponential growth stories or ground floor opportunities. There are two clear differences between Bulletin Boards and Pinks, however, and both are very important aspects of liquidity and transparency. Bulletin Board stocks are required to file all of the same financial reports to the SEC as listed stocks, but have no minimum price requirement. In addition to not being required to file, it is often hard to obtain a Level II quote for Pink Sheet stocks. Although there is a new breed of timely filling level two accessible Pink Sheet stocks emerging, of which we are paying very close attention to, at the present time we tend to stick with the OTC BB. All of this coupled with our price requirements above narrows our parameters of what Penny Stocks are to a consistently smaller list of approximately 1000 stocks. From this list, we can separate the companies interested in shareholder value from those just interested in selling shares to the public. To further enhance our possibilities, we narrow this list once more in favor of the most highly liquid securities. |
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