Information is the investor's best tool when it comes to investing wisely. But accurate information about "microcap stocks" or low-priced stocks issued by the smallest
of companies (also known as Penny Stocks), may be difficult to find. Many microcap companies do not file financial reports with the SEC, so it's hard for investors to get the facts about the company's management, products,
services, and finances. When reliable information is scarce, fraudsters can easily spread false information about microcap companies, making profits while creating losses for unsuspecting
investors.
The term "microcap stock" applies to companies with low or "micro" capitalizations, meaning the total value of the company's stock. Microcap companies typically have limited assets. For
example, in cases where the SEC suspended trading in microcap stocks, the average company had only $6 million in net tangible assets and nearly half had less than $1.25 million. Microcap stocks
tend to be low priced and trade in low volumes.
Many microcap stocks trade in the "over-the-counter" (OTC) market and are quoted on OTC systems, such as the OTC Bulletin Board (OTCBB) or the "Pink Sheets."
OTC Bulletin Board - The OTCBB is an electronic quotation system that displays real-time quotes, last-sale prices, and volume information for many OTC securities that are not
listed on the Nasdaq Stock Market or a national securities exchange. Brokers who subscribe to the system can use the OTCBB to look up prices or enter quotes for OTC securities. Although the
NASD oversees the OTCBB, the OTCBB is not part of the Nasdaq Stock Market. Fraudsters often claim that an OTCBB company is a Nasdaq company to mislead investors into thinking that the company
is bigger than it is.
The "Pink Sheets" - The Pink Sheets, named for the color of paper on which they've historically been printed, are listings of price quotes for companies that trade in the
over-the-counter market (OTC market). "Market makers" the brokers who commit to buying and selling the securities of OTC issuers-can use the pink sheets to publish bid and ask prices. A company
named Pink Sheets LLC, formerly known as the National Quotation Bureau, publishes the pink sheets in both hard copy and electronic format. Pink Sheets LLC is not registered with the SEC as a
stock exchange, nor does the SEC regulate its activities.
How Are Microcap Stocks Different From Other Stocks?
1) Lack of Public Information - The biggest difference between a microcap stock and other stocks is the amount of reliable, publicly available information about the company.
Larger public companies file reports with the SEC that any investor can get for free from the SEC's website. Professional stock analysts regularly research and write about larger public
companies, and it's easy to find their stock prices in the newspaper. In contrast, information about microcap companies can be extremely difficult to find, making them more vulnerable to
investment fraud schemes.
2) No Minimum Listing Standards - Companies that trade their stocks on major exchanges and in the Nasdaq Stock Market must meet minimum listing standards. For example, they
must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies on the OTCBB or the Pink Sheets do not have to meet any minimum standards.
3) Risk - While all investments involve risk, microcap stocks are among the most risky. Many microcap companies tend to be new and have no proven track record. Some of these
companies have no assets or operations. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to microcap stocks
involves the low volumes of trades. Because microcap stocks trade in low volumes, any size of trade can have a large percentage impact on the price of the stock.
Note: Smaller companies, those with less than $10 million in assets, generally do not have to file reports with the SEC. But some smaller companies, including microcap
companies, may choose voluntarily to register their securities with the SEC. As described above, companies that register with the SEC must also file quarterly, annual, and other reports.
To invest wisely and avoid investment scams, research each investment opportunity thoroughly and ask questions. These simple steps can make the difference between profits and
losses:
1) Find out whether the company has registered its securities with the SEC or your state's securities regulators.
2) Make sure you understand the company's business and its products or services.
3) Read carefully the most recent reports the company has filed with its regulators and pay attention to the company's financial statements, particularly if they are not
audited or not certified by an accountant. If the company does not file reports with the SEC, be sure to ask your broker for what's called the "Rule 15c2-11 file" on the company. That file will
contain important information about the company.
4) Check out the people running the company with your state securities regulator, and find out if they've ever made money for investors before. Also ask whether the people
running the company have had run-ins with the regulators or other investors.
5) Make sure the broker and his or her firm are registered with the SEC and licensed to do business in your state. And ask your state securities regulator whether the broker
and the firm have ever been disciplined or have complaints against them.
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