The term "penny stock" generally refers to low-priced (below $5), speculative securities of very small companies. All penny stocks trade in the OTC Bulletin Board or the Pink Sheets—but not on national exchanges, such as the New York Stock Exchange, or the Nasdaq Stock Market.
Before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document describing the risks of investing in penny stocks. The broker-dealer must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must send monthly account statements showing the market value of each penny stock held in the customer’s account.
To invest wisely and avoid investment scams, research each investment opportunity thoroughly and ask questions. Make sure you understand the company's business and its products or services.
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