Pension Fund

First of all, a penny stock is a stock that is priced between 1 cent and $5 and is traded over the Pink Sheets or the OTC Bulletin Board. These stocks may also trade on foreign and other securities exchanges. However, when trading penny stocks, there are penny stock rules that must be followed that are different from the trading of stocks on the major exchanges.

The Securities and Exchange Commission (SEC) has set forth penny stock rules when trading and these rules are:

  1. The SEC requires the brokerage firm to obtain a written agreement from the customer regarding the transaction and the customer must be approved to complete the transaction.
  2. The firm is required by the SEC to provide the customer with a document that outlines the risks of penny stock investing.
  3. The rules state that the consumer must be notified if there is a market quotation and what the market quotation is for the penny stocks the investor wishes to buy.
  4. The firm must also disclose to the customer what their commission will be for the trade.
  5. Penny stock rules also state that the firm must provide the customer with monthly statements that discloses the market value of each penny stock.

These penny stock rules are necessary to ensure proper trading of penny stocks and that the investor is aware of all risks associated with it. The SEC carefully outlines the penny stock rules that brokers must follow in order for the investor to have the best experience possible trading penny stocks by making the investor aware of all risks associated with penny stocks as to not cause them to get in over their head.

In the penny stock rules, there is a Customer Protection Rule (Rule 15c3-3) that states the control all of the money that is paid by the investor is on the hands of the broker. The broker must periodically figure up how much money is being held that belongs to the customer or has been obtained from securities owned by the customer. If the broker determines that there is more money on hand than what is owed to the customer or from the customer to the broker, the money must be placed within a reserve bank account. This money is placed within the bank account for the sole benefit of the customers. This rule is very important because it prevents the brokerage from using funds that belong to customers to fund their own business.

Penny stock rules are designed to protect the customer, the stock market, and the broker. If a broker breaks any of these rules set forth by the SEC, then the broker can be subject to SEC investigations that can result in serious trouble for the brokerage firm. That is why it is important for the investor to be aware of the penny stock rules and make sure the broker is following all rules accordingly so that the investments of the investor are not compromised in any way.