Penny Stocks And SEC Regulations

Penny stocks are stocks that have low value and they are commonly sold outside the stock exchanges. All stocks which are sold on the stock exchanges have to meet some regulations. The penny stocks are usually sold “over the counter” and have high risk. But, if you are beginner in the capital market it will be easier for you to start with penny stocks because of their small value although the risk of loosing the money is higher than investing in stocks which are sold on the stock exchanges such as : NYSE and NASDAQ.

All trading of stocks on the stock exchange is monitored by SEC (Securities and Exchange Commission) and this commission has the task to protect the interest of all people involved in trading. Securities and Exchange Commission frames rules and guidelines for properly functioning of stock exchanges. SEC has a role in facilitating the capital formation on the market and also takes oversight of fair trading.

Penny stocks are not approved nor disapproved by SEC. There is noting illegal in trading with penny stocks, but the trade of penny stocks is outside of the NYSE, NASDAQ or any other stock exchange in the US. The penny stocks are traded” over the counter” and out of regulations of SEC.

However, the Securities and Exchange Commission tries to control the trading with penny stocks. How does the SEC control the trading of penny stocks if they are not sold on stock exchanges? The broker or dealer hired by the person or company who wants to sell penny stocks will confirm that his client is to sell them. Before the transaction the broker should have this written request from his client.

The broker should also give a document to the client in which it is stated the desire of his client to buy penny stocks from a company. In this document, it should be stated the risk the client is taking when investing in penny stocks. Also SEC rules that the broker is obligated to inform the buyer of penny stocks about the commission he will be charged. The client furthermore will be informed on the market rate of penny stocks and variations in price during the time.

At the end of every month, as SEC rules, the broker is obligated to give to its client a monthly statement with market rates of the stocks he has bought. The brokers find it mandatory to follow the rules of SEC otherwise they will be punished. By enforcing these regulations, the SEC is able to be controlling the penny stocks market and trading. In this way the risk for buyers of penny stocks is somewhat lower and this is the reason for the involvement of the SEC; to make penny stock trading as safe as possible.

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