Penny stocks get their name from their price range, each priced between 1 cent and $5 and they are traded through the Pink Sheets or the OTC Bulletin Board. You can also trade these stocks via foreign and other securities exchanges. However, when trading penny stocks you must be aware of the rules that apply to the trade 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 secure a written agreement with their client abut the transaction and their client must be in a position to complete this agreement.
The SEC requires all brokerage firms to supply their clients with documentation that outlines that risks involved with trading penny stocks.
The rules also state that the consumer must be notified if there is a market quotation and what that market quotation is for the penny stocks they wish to buy.
The firm must also inform their customer of their commission 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.
Penny stock rules are necessary to ensure that proper trading of penny stocks occur and that each investor knows that risks involved. These rules were set in place by the SEC to ensure that new investors knew what they were getting into and that they wouldn’t 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. The broker must then periodically figure how much of the money being held belongs to the customer of has been gained through stocks owned by the customer. If the broker comes to the conclusion that there is more money on their hands than that which is owed to their customers or which has been paid from their customers then this money is put into a reserve bank account. The money in this account is for the sole benefit of the customers. This vital rule helps to stop brokerages from using their clients money to further their own business interests.
These rules are designed to protect the customers as well as the stock market and even the broker. 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 is a good idea for any new investor, this can help you to make sure that your broker is following the rules and helps you to make sure that your investments are not compromised.
About the author: Brenda Seal reveals the best hot penny stocks and options trading on her sites.
