Are All Penny Stocks Created Equal?

list all penny stocks

Amazingly enough, a number of Yankee monetary sector stocks were thrown into penny stock realm in the past 2 weeks. In the past few months, even bigger banks announced bankruptcy.

The SEC defines penny stocks as “low-priced (below $5), speculative securities of very stocks of little companies. While all penny stocks generally are quoted OTC, for example on the OTCBB or in the Pink Sheets, they may also trade on stocks exchanges, including foreign stocks exchanges. In addition, penny stocks include the instruments of certain private companies with no active trading market.”

By this definition, the monetary sector stocks like Citibank and Bank of America, are penny stocks.

Last fall, the SEC took the unheard-of action of banning short sales and looking for a short cover on money sector stocks that taken a thrashing by the shorts. It’s a lament that penny stock corporations have been complaining of for years, but went unheeded.

And now these established, down-on-their-luck money corporations have convinced the Yank public that they are deserving of billions in taxpayer greenbacks because they are established corporations and not traditional penny stocks as outlined by the SEC.

So what have we really done for these behemoths? We’ve changed the definition of penny stocks to accommodate them. We’ve changed the level playing field by exempting them from short sellers. And now we are giving them tax greenbacks like some government sponsored clinic while hard working entrepreneurs have to fight for their place in this shrinking economy.

Are these billion dollar bailout babies truly that different from your traditionally defined penny stock?

Traditionally, risk characteristics attributed to all penny stocks include:

1. Penny stock companies are sometimes startups that are lacking of information about the company, its history and its management. I might disagree that money sector companies suffer from the same shortage of transparency. In fact, how could anyone not see the leverage and the badly judged asset classifications and still invest in these behemoths? The derivatives are far too difficult for the layman to investigate. So we rely on the banks to tell us the truth, while they have a conflict.

2. Enormous control blocks. Penny stock company founders traditionally have a large block of stock (albeit restricted) to guarantee their interests are aligned with the remainder of the shareholders while making certain they cannot sell their shares for a fast profit at the detriment of other shareholders. In the fiscal sector, these huge blocks are held by fund bosses who similarly cannot sell their blocks quickly without lowering the market price and thus damaging the return to themselves. What’s more, the Chief Executive Officer’s of the firms hardly have any stock in their portfolios, junking the alignment with shareholder values. Instead, it’s become vogue to pay these Head honcho’s through stock options, giving them an incentive to show short term results and then cash out their options while the remainder of the investing public holds shares that were sold by insiders.

This is done by trying oblivious brokers, paid researchers and unquestioning media to tow the company line. And as the CEO’s and the firms have been held in high esteem, no one questions the use of these tools or their motives.

Penny stock firms regularly use similar tools. Only with a penny stock it’s called stock promotion. And penny stock firms have better motives: without stock promotion, the best company in the world will not be worth anything because no one would have heard of it - and therefore the company would be hard pressed to raise cash for growth. Promotion should be a driving investment criterion for selecting a penny stock.

The issue with promotion is that the SEC regularly believes that stock promotion concerning a penny stock wishes more supervision than the promotion being conducted by bn. Buck house hold names. Is there in reality a possibility a possibility for crime in the penny stock market? Of course there is.

But I contend that the risk is far higher with well established firms that have Chairperson’s holding stock options ( giant motive for early liquidation since options expire) rather than actual restricted stock (unsellable) for which they actually paid (as many penny stock companies experience). Empirical proof is offered by the billions lost in the financial sector offered by the billions lost in the fiscal sector right under the SEC and other regulatory bodies than has ever been lost on all penny stocks.

3. All penny stocks are often accused of being used by scam artists who sell them through spam email or off-shore brokers. As the recent IRS/SEC probes have proven, many, many, many American CEO’s have offshore accounts making them no more honest or dishonest than the operators of penny stock companies.

Both traditional penny stock startups and the fallen as exemplified by the financial than the potential for growth and for fraud. Both are blighted by cash requirements, by short sellers and by image by the finance sector have the aptitude for expansion and SEC fighting for them while the typical startup penny stock company is vilified. The dichotomy is even more surprising when we stop to think that economists have long been telling us, and the American experience has long proved that the start-up is what drives the economy, diversifies the job base, creates the most jobs and is lean enough to take advantage of changing times.