Penny Stocks Listings: What To Know
Although there is no outright definition for penny stocks, The Securities and Exchange Commission coined the term as any stock that trades under 5 dollars in the over-the-counter market (OTC). The words “over the counter” refers to how they are mostly influenced by personal/dealer-based market, unlike those that operate on a centralized exchange system.
The reason for alternative listing is because most penny-stocks are companies that are just starting out or have been around for a while, but do not have the resources(assets, Revenue etc.) at hand to file on a global exchange like the NASDAQ. While most Stocks are traded on the NYSE and SME Exchanges, the majority of Penny stocks are often quoted on the OTC bulletin board. It is then broken up into three different categories that list on the OTC market: Pink markets, OTCQB and OTC QX based upon the levels of disclosure and financial requirements they decide to begin with.
1. Pink markets
The Pink Open Market – The lowest tier of the three – actually requires no minimum financial standards and is the least watched in terms of company disclosure. (Investors MUST continue with active caution, thoroughly researching the companies before investing) Stocks that operate via the pink sheets have their pros and cons. The most important being the lack of publically-available information, which can be used as an arbitrary-tactic based on your access to alternative information.
The companies are then further segmented into two different levels based on their disclosure, Pink Current (High disclosure) and Pink Alternative (low/no disclosure). Regardless, both only report to the OTC and not the Securities and exchange commission. Also, Companies typically listed on the pink sheets are not as liquid as those on normal exchanges, that being said the bid-ask spreads can be very large.
The OTCQB – Also known as the Venture Market – is utilized by developing U.S and international companies that do not have the qualifications required to list on the OTCQX. Created back in 2010, The OTCQB was an effort to distinguish stocks that offer full disclosure and those who do not, offering a new category of safer pink-sheet stocks. The trade-off also including a new level of financial requirements for companies wishing to be listed. Including but not limited to a minimum bid price test of $0.01 dollars and a bar against companies involved in bankruptcy proceedings.
Being required to disclose filings to the SEC offers a level of transparency and credibility that was not yet available to stocks trading on the pink sheets, without giving up the benefit of having minimal financial requirements. Although their information is disclosed to the SEC, OTCQB stocks should still be analyzed with the same levels of due diligence used with companies listed on the pink sheets.
The OTCQX – often acclaimed as the premier tier of the OTC –is the most transparent of all the three. The qualifications for listing include higher financial standards combined with a demanded compliance with United States Security laws. The difference here is that the OTCQX only has to report to the OTC, which can lead to astoundingly lower costs in comparison to SEC reporting. On the other hand, this still does not take away from the level of risk seen in penny stocks of this nature.
The beauty of the OTCQX-market is that the quality of listed-companies are the most transparent on the OTCBB. The financial requirements work as a safety net that encourages investors to research and trade these companies. These stocks also have greater liquidity than the other tiers, resulting in higher trading levels and overall coverage.
When deciding on penny stocks, you should always know the level of risk you wish to take on. As disclosure laws get tighter, the OTC market will be forced to engage in different ventures and listings that will further encourage the financial transparency and overall credibility of penny stocks. Which in turn will cause an overall inflow of trading for all levels of these stocks. At the end of the day, investors don’t want to dive into the unknown and as the OTC continues to further solidify their credibility money will begin shifting slowly towards penny stocks.