Penny Stock Trading Rules & Regulations

If you are new to learning how to invest in penny stocks, you will want to be aware of the Penny Stock Trading Rules and Regulations and how they can affect you.

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When new to investing and trading penny stocks, you will want to ensure you know everything about the rules regarding Penny Stock trading. Penny stocks can be extremely risky, and so as a result there are many laws and rules in place to help protect you. While these regulations can limit you as a new beginner investor, in general they are useful. These rules are created and enforced through The Securities and Exchange Commission (SEC), and affect you the trader as well as the online broker you choose to use to make your trades. Today we will talk about these penny stock trading rules and regulations and how they affect you.


Why the Rules?

Penny stocks are very high risk and investors often make decisions purely on their own speculation of how a stock may perform. You may notice some penny stocks do not move at all, or the company could go completely bankrupt, especially when it is common for many new startups to fail.

Penny stock laws, rules and regulations are created and designed to protect you (the customer), the stock market exchanges, and the broker. If a broker breaks any of these rules set forth by the SEC, then the broker can be subject to SEC investigations that can result in serious trouble for the brokerage firm. If the broker is in trouble, this can cause you to lose your investments as well.

This is why it is important for the beginning trader/investor to be aware of the penny stock rules. You need to make sure the broker you choose to use is following all rules accordingly so that your trades and investments are not compromised in any way. It’s also important you understand these rules so you do not get stuck as a new trader.

Understanding Which Penny Stocks Are Affected By These Rules

While I generally classify a penny stock as a stock that is trading between $1-$10 when looking for companies to add to my stock watch list, the SEC defines a penny stock as any stock that is priced between 1 cent and $5. While these rules can apply to many different exchanges, these rules are especially enforced when a penny stock is traded over over-the-counter {i.e.: The OTC Bulletin Board}.

Here is an Overview of the Penny Stock Trading Rules

Broker Requirements
All brokers must comply with Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”).

Every broker must do the following:

    • First approve the customer to be eligible for penny stock trading. This is often done through brokerages who set forth a minimum account amount or other process.
    • The brokerage firm must obtain a written agreement from the customer regarding purchasing the penny stock and the transaction must be approved to complete the transaction.
    • Provide the customer with a disclosure document which clearly outlines all of the risks which are likely when trading penny stocks.
    • Disclose the current market quotation for the penny stock to the consumer.
    • The firm must also clearly disclose to the customer what their commission will be for the trade, as well as what costs the investor will incur and the amounts of compensation the brokerage firm will receive for the trade.
    • The brokerage must also report account statements each month to the customer which clearly represents the current market value of each penny stock held in the customer’s account. They must also abide to The Customer Protection Rule (Rule 15c3-3), which states the brokerage firm cannot use funds that belong to customers to fund their own business.

While these laws and regulations may seem to be a huge hassle, remember they are there to protect you. It is EXTREMELY risky to invest in Penny Stocks, especially when purchasing them through the OTC Bulletin or other over-the-counter exchange.

I hope this is helpful for those of you who may be considering investing in penny stocks. If you have any penny stock trading questions, ask them in the comments below – or even better, join TheTradeLocker Free Stock Market Community – we’d love to have you join the discussion and to help you improve your trading strategies!

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