Penny Stock Brokers 4u

Micro cap stocks are those stocks that are traded on companies that have under $300 million in market capitalization with those under $50 million of market capitalization further described at nano-cap stocks. While some of the more established micro cap stocks are traded on the major exchanges such as the AMEX and NASDAQ, most have their prices quoted on the Pink Sheets or the OTC Bulletin Board (OTCBB).  Still other micro cap stocks are listed on foreign exchanges.  The average micro cap company most often actually has less than $6 million in net assets with a great deal of them having only having $1 million in net assets.

Although micro cap stocks have the ability to outperform standard stocks, they are considered very high risk as a great number of these companies go out of business or are subject to price manipulation or outright fraud.  Micro cap stocks are unlike other stocks as follows:

• Amount of Information – It can be near impossible to obtain reliable public information about micro cap stock companies. Because the smallest companies do not have to file periodic reports with the SEC, often there are no public financials to be found anywhere. Once a company reaches more than 500 investors and $10 million in assets or wishes to be listed on one of the major exchanges then they will need to file SEC reports – until then you may be able to get financial information direct from the company but it will not usually be audited. On top of that, very few stock analysts are interested in researching micro cap companies. If an investor is considering a micro cap stock and cannot get information from the SEC, they should try to get information on their own from the company, from state securities regulators or other government regulators or from the Secretary of State from the state in which the company is incorporated. Depending on the industry the company is in, other types of regulations may exist that require financial reporting. If looking to all of these brings you nothing, then it is most likely a scam and you should report it to the SEC or your state securities regulator.
• Risk – Although there is no such thing as a guaranteed investment in the stock market, the greatest risk lies with micro cap stocks. These are most often new companies with no proven experience, few assets, still in development and completely untested. Furthermore, the trade volumes on these stocks are so low that it can be difficult to sell shares down the road resulting in having to offer them at below value to sell them if you can even sell them at all.
• Standards – Because micro cap stocks are usually not listed on the major exchanges, they do not have to meet any minimum standards such as net assets or number of shareholders.
• SEC Registration – Any company wishing to offer shares to the public must register with the SEC unless they meet an exemption. Micro cap companies usually use one of the exemptions so they do not have to register.  The most commonly used exemptions are Regulation A and Regulation D. Regulation A exempts companies that have raised less than $5 million in a 12-month period.  Regulation D exempts companies that have raised less than $1 million in a 12-month period or have sold to 35 or less investors that meet high net worth or income standards.

Investing in micro cap stocks can produce a nice return making them appealing to some investors. Since they are high risk, the investor that wishes to protect his portfolio will do everything they can to investigate any stock before purchasing it. The best safe guard is to research carefully and be aware of the red flags that would indicate a fraudulent or undesirable offering.  When researching, here are a few things to be sure to look into:

• Check to see if they have registered with SEC or the state securities regulators.
• Review the individuals that are operating the company to see if they have ever been investigated or had issues with other investors.
• Read all reports about the company you can find being careful to note whether they have been audited or certified by an accountant. Ask your broker for the Rule 15c2-11 file on the company if it is not filing SEC reports.
• Investigate that the broker handling the transaction is fully registered and licensed, and has not had any complaints or disciplinary actions against them.
• Watch for red flags:
  • Unusual items in financial statement footnotes.
  • Insiders own a great deal of the stock – this can make it easy for the company to manipulate the price and perform the classic “pump and dump” scheme.
  • Auditing – If the company’s accountant has not certified the financial statement, it is usually for a good reason.
  • Asset to Revenue Ratio – If a company shows higher assets than seems reasonable given the amount of revenue, investigate whether those assets are truly business related and not listed just to make the company appear more solvent than they are.
  • Avoid high pressure sales tactics – often used when fraud is involved.
  • SEC trading suspensions – If the SEC has ever suspended trading on a stock, it is a pretty good guess that they had reason to do so.  You can find this information on the SEC website.
  • Cold Calling – Never give personal information to a stranger on the telephone. A recent scam also involves callers leaving messages on answering machines acting like they are calling a friend with a great stock tip giving the recipient the impression that they have luckily obtained “insider” information by an accidental wrong number.
  • No information – If the broker will not give you written information about the security, do not buy it and do not use this broker! At best scenario they are lazy; at worst they are attempting to scam you.

Obviously micro cap stock investments are not for everyone. Only those that can tolerate a high risk investment and have a portion of their portfolio they feel comfortable risking should even consider investing in micro cap stocks. It can be fun and interesting to those that do it though so long as they understand the risk involved.