Understanding Penny Stocks and SEC Regulations Articles | Stock Market

By: Guy Starbuck

Penny stocks are traded outside the jurisdiction of the stock exchanges. They are of low value but buying them involves high amount of risk. All stocks which come under the purview of stock exchanges are governed by certain rules and regulations which do not apply to penny stocks. Be that as it may, investing in penny stocks is a good investment idea for beginners as the possible losses from the low value stocks also tend to be lower and manageable than the losses which can be incurred by investing in stocks traded in stock exchanges like NYSE and NASDAQ.

All stocks traded via the stock exchanges are supervised and monitored by the SEC or Securities and Exchange Commission. This body takes care of the investors’ interests who are involved in stock trading. SEC is also responsible for formulating all the rules and laws which govern the functioning of stock exchanges. They play an active role in developing the market capital and also ensure fair trading practices.

Though the SEC neither approves nor disapproves the penny stock market, there is nothing illegal about its transactions which take place outside the purview of NYC, NASDAQ or any other stock exchange in the US. The penny stocks are traded over the counter out of regulatory area of the SEC.

However, there is some amount of control exercised by SEC on penny stock trading. But how is that possible when the penny stocks are not even under their purview? The broker or dealer which the company desiring to issue penny stocks in the market must confirm that his client is agreeable to sell his stocks and he must get a written request to do so from his client.

The broker also should give a written document to the investing customer that the investor is willing to buy penny stocks from a company. This document clearly specifies the amount of risk the investor is taking during this investment. SEC rules also specify that the broker is obligated to inform the investor the quantum of commission that he will charge for every transaction. The investor would also be supplied with regular information on the market rate of the bought penny stocks as well as all the price variations which takes place during the time of investment.

As per SEC rules, the broker is obliged to give his investing client a monthly statement where the market rates and the fluctuations are all mentioned, of the penny stocks in which his client has invested. Punishment is the outcome for brokers who do not follow such guidelines. By enforcing such guidelines, the SEC controls and monitors the transactions in the penny stock trading market. SEC involvement in this trade naturally reduces the risk of the investing public in the penny stock market as their intervention can make the market safe for trading.