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The securities industry has tough rules when it comes to brokers soliciting the purchase of “penny stocks.”  Typically a stock is considered a “penny stock” when it trades for less than $5 a share and it does not trade on a major exchange (e.g., New York Stock Exchange or NASDAQ).  Penny stocks normally trade on the OTC Bulletin Board (OTCBB) or Pink Sheets. 

Aside from the requirements, among others, that soliciting brokers have to supply investors with a document disclosing the risks associated with penny stocks and wait, in some cases, 2 days after providing the disclosure document before placing your first order (i.e., “speed bump”), there are actual disclosure ratings assigned to each penny stock. 

A market center called OTC Markets places penny stocks into different disclosure categories based on things from whether or not the company is current on its financial reporting to whether the stock is the subject of fraud or stock promotion.  Your broker and his brokerage firm and clearing firm have access to this information and so do you.  There are over 13,000 stocks having either the label of “Caveat Emptor,” “Grey Market,” or “Pink Sheets No Information.”  Have you bought a penny stock recommended by a stock broker that has one of those labels?  Did your broker disclose that to you?

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