Stocks that trade at a very low price, have very low market capitalization, are mostly illiquid, and are usually listed on a smaller exchange is known as Penny stocks. Penny stocks are equity securities that run significant investment risks for investors.
These stocks are very speculative and are considered highly risky because of lack of liquidity, the smaller number of shareholders, large bid-ask spreads and limited disclosure of information. Penny stocks are often used and manipulated for fraudulent purposes. It is an easy target for the market operators to pump and dump the prices of such penny stocks thereby trapping naive investors to lose the invested capital.
Due to the speculative nature and the risks involved in penny stocks, Congress banned broker-dealers from conducting penny stock transactions unless they complied with the demands of Section 15(h) of the Securities Exchange Act of 1934.
These SEC rules provide, among other things, that a broker-dealer must
Furthermore, a broker-dealer must send monthly account statements to his client after completing the sale, displaying the market value of each penny stock kept in the account of the client.
If you feel you have been deceived into investing in a penny stock, please do not hesitate to reach out to us for legal assistance.