subject: Rules About Penny Trading The Investors Should Know [print this page] 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. The rules that regulate stock trading are different from those that regulate the trading 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 SEC needs the brokerage house to have documented evidence of the transaction between them and their customer, which can only happen if their customer is in a position to complete the transaction.
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 penny stock rules also say that the brokerage house must also provide their customers with monthly statements that disclose the value of each penny stock the customer owns.
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. The SEC deemed these rules necessary to make sure that each new investor knew all the risks involved and that they took precautions no to 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. Periodically your broker will need to figure out how much of the money they have on their hands belongs to you or has been gained via your investments. If the broker decides that there is more money on their books than what is owed to the customer or if the customer has over paid, the excess must be placed into a reserve bank account. This money is then set aside for the specific use of the customers. The rule stops brokers from using a customers money to advance their own business.
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 the SEC's rules that they will be the subject of SEC investigations and that can spell trouble for the brokerage house as well. learning these rules and making sure that your broker is following them means that you will know that your investments have not been compromised in any way.
by: Jose Abbott
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