Defensive stocks generally provide consistent returns in most economic conditions and stock market environments.
Category: stock trading FAQ’s
Income stocks suit risk-averse investors who seek regular income through dividend payments.
Preferred stock gives holders priority over a company’s income but does not provide voting rights like common stock.
When Is It Not a Penny Stock?
Multiple events can trigger the transition of a penny stock to a regular stock. The company can issue new securities in an offering that is registered with the SEC, or it can register an existing class of securities with the regulatory body.
Both types of transactions automatically require the firm to adhere to periodic reporting, including disclosures to investors about its business activities, financial conditions, and company management unless there is an exemption. These filings also mandate 10-Q quarterly reports, the annual Form 10-K, and periodic Form 8-K reports, which detail unexpected and significant events.
In some instances, there are additional conditions that will require a company to file reports with the SEC. Reports must be filed if a company has either at least 2,000 investors, more than 500 investors that can’t be categorized as accredited investors, and possesses more than US$10 million in assets.
Usually, companies with no more than $10 million in assets and fewer than 2,000 recorded shareholders don’t have to adhere to reporting guidelines under the SEC.9 Interestingly enough, some companies opt for transparency by filing the same types of reports that other, perhaps more reputable, firms are required to do.
How Is a Penny Stock Created?
Small companies and startups typically issue stock as a means of raising capital to grow the business. Although the process is lengthy, issuing stock is often one of the quickest and most effective ways for a startup company to obtain capital.
A penny stock, like any other publicly traded stock, is created through a process called an initial public offering or IPO. To be listed on the OTCBB the company must first file a registration statement with the SEC or file stating the offering qualifies for an exemption from registration. It must also check state securities laws in the locations it plans to sell the stock. Once approved, the company may begin the process of soliciting orders from investors.
Finally, the company can apply to have the stock listed on a larger exchange, or it can trade on the over-the-counter market.
Penny Stocks Explained
In the past, penny stocks were considered any stocks that traded for less than one dollar per share. The U.S. Securities and Exchange Commission (SEC) has modified the definition to include all shares trading below five dollars. The SEC is an independent federal government agency responsible for protecting investors as they maintain fair and orderly functioning of the securities markets.
Penny stocks are usually associated with small companies and trade infrequently meaning they have a lack of liquidity or ready buyers in the marketplace. As a result, investors may find it difficult to sell stock since there may not be any buyers at that time. Because of the low liquidity, investors might have difficulty finding a price that accurately reflects the market.
Due to their lack of liquidity, wide bid-ask spreads or price quotes, and small company sizes, penny stocks are generally considered highly speculative. In other words, investors could lose a sizable amount or all of their investment.
Buying power refers to the total funds that an investor has available to trade securities, and it equals cash held in the account plus available margin. According to FINRA rules, a broker-dealer client who is designated as a pattern day trader may trade up to four times their maintenance margin excess as of the previous day’s close of business for equities.
According to the Financial Industry Regulatory Authority (FINRA) rules, the minimum equity requirement for a client of a broker-dealer who is designated as a pattern day trader is $25,000, which must be deposited into the client’s account prior to any day-trading activities and maintained at all times.
Day traders typically do not hold positions overnight for a number of reasons: Most brokers have higher margin requirements for overnight trades, and therefore additional capital is required; a stock can gap down or up on overnight news, inflicting a big trading loss; and holding a loss-making position overnight in the hope that part or all of the losses can be recouped may violate the trader’s core day-trading philosophy.
Arbitrage is the simultaneous purchase and sale of the same security in different markets to profit from minute differences in the security’s price in these markets. Because arbitrage provides a mechanism to ensure that any deviation in the price of an asset from its fair value gets corrected rapidly, arbitrage opportunities seldom last long.