Penny Stocks Created Equal?

Amazingly sufficient, a number of American financial region shares were thrown into penny inventory realm inside the past two weeks. In the past few months, even bigger banks declared financial ruin.

The SEC defines penny stocks as "low-cost (below $five), speculative securities of very small organizations. While penny stocks generally are quoted over the counter, together with on the OTCBB or in the Pink Sheets, they will additionally alternate on securities exchanges, consisting of foreign securities exchanges. In addition, penny shares include the securities of certain private companies without a energetic trading marketplace."

By this definition, the economic region stocks like Citibank and Bank of America, are penny shares.

Last fall, the SEC took the exceptional action of banning brief sales and calling for a quick cowl on financial quarter stocks that taken a beating with the aid of the shorts. It's a lament that penny inventory companies had been complaining of for years, however went unheeded.

And now those installed, down-on-their-good fortune financial agencies have convinced the American public that they may be deserving of billions in taxpayer dollars due to the fact they're established groups and now not traditional penny shares as described by way of the SEC.

So what have we truely carried out for those behemoths? We've altered the definition of penny stocks to accommodate them. We've altered the level playing discipline by using exempting them from short sellers. And now we're giving them tax dollars like some authorities sponsored health center at the same time as difficult operating marketers ought to fight for their vicinity in this shrinking economy.

Are these billion dollar bailout toddlers clearly that specific from your traditionally defined penny stock?

Traditionally, risk traits attributed to penny shares include:

1. Penny inventory businesses are usually start-usathat lack of records about the business enterprise, its records and its control. I might argue that economic area groups suffer from the equal lack of transparency. After all, how could every person no longer see the leverage and the inaccurate asset classifications and nonetheless invest in these behemoths? The derivatives are way too complicated for the layman to analyze. So we rely at the banks to tell us the fact, while they've a warfare.

2. Large control blocks. Penny stock business enterprise founders historically have a big block of inventory (albeit limited) to make certain their pastimes are aligned with the relaxation of the shareholders whilst making sure they can not sell their shares for a fast earnings at the detriment of other shareholders. In the monetary zone, these huge blocks are held with the aid of fund managers who in addition can't sell their blocks fast without decreasing the marketplace charge and thereby impairing the go back to themselves. What's greater, the CEO's of the corporations slightly have any inventory in their portfolios, disposing of the alignment with shareholder values. Instead, it is turn out to be fashion to pay those CEO's via stock options, giving them an incentive to expose short time period consequences and then coins out their alternatives while the rest of the making an investment public holds stocks that have been bought by means of insiders.

This is achieved with the aid of using unwitting brokers, paid analysts and unquestioning media to tow the employer line. And due to the fact the CEO's and the groups had been held in high esteem, no person questions the use of these equipment or their reasons.

Penny stock companies regularly use comparable equipment. Only with a penny inventory it's called stock promoting. And penny stock agencies have better motives: with out stock promoting, the first-rate employer in the world won't be worth some thing because no person might have heard of it - and therefore the enterprise could be difficult pressed to elevate money for increase. Promotion have to be a driving funding criterion for choosing a penny stock.

The difficulty with merchandising is that the SEC often believes that stock promoting regarding a penny inventory needs more supervision than the merchandising being carried out via billion greenback house keep names. Is there in reality an possibility for fraud within the penny stock marketplace? Of path there is.

But I contend that the risk is lots better with nicely set up organizations which have CEO's maintaining stock options (large cause for early liquidation considering alternatives expire) in preference to actual restricted stock (unsellable) for which they clearly paid (as many penny inventory groups revel in). Empirical evidence is offered by means of the billions lost in the financial quarter right underneath the nose of, and with the blessing of the SEC and other regulatory our bodies than has ever been misplaced on penny stocks to buy now.

3. Penny stocks are regularly accused of being used by scam artists who sell them through unsolicited mail email or off-shore agents. As the latest IRS/SEC probes have validated, many, many, many American CEO's have offshore debts making them no greater sincere or cheating than the operators of penny stock companies.

Both traditional penny inventory startups and the fallen as exemplified with the aid of the financial quarter have the capability for growth and for fraud. Both are blighted by way of cash requirements, by means of quick dealers and via photograph troubles.

The distinction is that the fallen companies have the authorities and SEC fighting for them even as the everyday startup penny inventory organization is vilified. The dichotomy is even more unexpected while we stop to suppose that economists have lengthy been telling us, and the American revel in has lengthy proved that the start-up is what drives the economic system, diversifies the task base, creates the most jobs and is lean sufficient to take benefit of converting instances.