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Elijah Robinson
Elijah Robinson

Can You Buy Penny Stocks Without A Broker

This tier is also known as the Open Market. There are no minimum financial standards, and it can include a wide variety of companies, including foreign companies, penny stocks, shell companies, and other firms that choose not to disclose financial information. Within the Pink Market, firms are classified as showing Current Information, Limited Information, or No Information.

can you buy penny stocks without a broker

The District of Columbia Department of Insurance, Securities and Banking (DISB) wants District of Columbia residents to be aware of the warning signs of penny stock scams. Penny stocks are generally stocks that trade at less than five dollars a share. This relatively low price per share can make them attractive to many investors with limited resources. Penny stock promoters often reach out to victims by cold calling them. Use this information to recognize and protect yourself. Many calls come from overseas using technology to mask their true location and identity.

Typically, penny stocks are the shares of troubled companies with very small market capitalizations that are not listed on major stock exchanges. While a few may still be listed on the NYSE or the Nasdaq, most penny stocks are traded via over-the-counter (OTC) transactions, or on the electronic OTC Bulletin Board (OTCBB) system.

Not all penny stocks are scams, but most of them offer no real chance for growth. Many sit idle for years without ever changing in value. A few may gradually appreciate and start trading on the larger stock exchanges, but those are the exception rather than the rule.

Few penny stocks are like Nautilus, however. While you might think the risks are low when prices are also low, penny stocks tend to carry much higher risk than stocks that trade on major exchanges. This makes it easier to lose money, no matter what the size of your investment.

With more mainstream stocks, investors can pop the hood, get plenty of financial data other required reporting to see how companies have performed. With penny stocks, you may be buying blind or be forced to invest large amounts of time researching them.

Many investors are drawn to penny stocks because they can buy a large number of shares for a small amount of money. If the company turns out to be a winner, the investor may make 100x or more his original investment. If the company fails, the loss is usually a small one.

Over-the-counter (OTC) is how penny stocks are traded via a broker-dealer network, and not on a centralized exchange (like the NYSE or NASDAQ). The stocks which trade OTC typically do not meet the standard requirements to be listed on a typical exchange.

The Securities and Exchange Commission (SEC) recently adopted seven rules ("Rules") under the Securities Exchange Act of 1934 requiring broker/dealers engaging in certain recommended transactions with their customers in specified equity securities falling within the definition of "penny stock" (generally non-Nasdaq securities priced below $5 per share) to provide to those customers certain specified information.

Unless the transaction is exempt under the Rules, broker/dealers effecting customer transactions in such defined penny stocks are required to provide their customers with: (1) a risk disclosure document; (2) disclosure of current bid and ask quotations, if any; (3) disclosure of the compensation of the broker/dealer and its salesperson in the transaction; and (4) monthly account statements showing the market value of each penny stock held in the customer's account. These SEC Rules were adopted in April 1992 pursuant to the requirements of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 ("Penny Stock Act"). The penny-stock definition and exemptive provisions are currently effective. The requirement for the delivery of the risk disclosure document to the customer became effective July 15, 1992. The other disclosure requirements take effect January 1, 1993. (A Federal Register copy of the rules is attached to this Notice.)

Legal remedies. If penny stocks are sold to you in violation of your rights listed above, or other federal or state securities laws, you may be able to cancel your purchase and get your money back. If the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages. If you have signed an arbitration agreement, however, you may have to pursue your claim through arbitration. You may wish to contact an attorney. The SEC is not authorized to represent individuals in private litigation. However, to protect yourself and other investors, you should report any violations of your brokerage firm's duties listed above and other securities laws to the SEC, the NASD, or your state securities administrator at the telephone numbers on the first page of this document. These bodies have the power to stop fraudulent and abusive activity of salespersons and firms engaged in the securities business. Or you can write to the SEC at 450 Fifth St., NW., Washington, DC 2G549; the NASD at 1735 K Street, NW.. Washington, DC 20006: or NASAA at 555 New Jersey Avenue, NW., Suite 750, Washington, DC 20001. NASAA will give you the telephone number of your state's securities agency. If there is any disciplinary record of a person or a firm, the NASD, NASAA, or your state securities regulator will send you this information if you ask for it.

The market for penny stocks. Penny stocks usually are not listed on an exchange or quoted on the NASDAQ system. Instead, they are traded between dealers on the telephone in the "over-the-counter" market. The NASD's OTC Bulletin Board also will contain information on some penny stocks. At times, however, price information for these stocks is not publicly available.

Market domination. In some cases, only one or two dealers, acting as "market makers," may be buying and selling a given stock. You should first ask if a firm is acting as a broker (your agent) or as a dealer. A dealer buys stock itself to fill your order or already owns the stock. A market maker is a dealer who holds itself out as ready to buy and sell stock on a regular basis. If the firm is a market maker, ask how many other market makers are dealing in the stock to see if the firm (or group of firms) dominates the market. When there are only one or two market makers, there is a risk that the dealer or group of dealers may control the market in that stock and set prices that are not based on competitive forces. In recent years, some market makers have created fraudulent markets in certain penny stocks, so that stock prices rose suddenly, but collapsed just as quickly, et a loss to investors.

The "spread". The difference between the bid and offer price is the spread. Like a markup or mark-down, the spread is another source of profit for the brokerage firm and compensates the firm for the risk of owning the stock. A large spread can make a trade very expensive to an investor. For some penny stocks, the spread between the bid and offer may be a large part of the purchase price of the stock. Where the bid price is much lower than the offer price, the market value of the stock must rise substantially before the stock can be sold at a profit Moreover, an investor may experience substantial losses if the stock must be sold immediately.

Primary offerings. Most penny stocks are sold to the public on an ongoing basis. However, dealers sometimes sell these stocks in initial public offerings. You should pay special attention to stocks of companies that have never been offered to the public before, because the market for these stocks is untested. Because the offering is on a first-time basis, there is generally no market information about the stock to help determine its value. The federal securities laws generally require broker-dealers to give investors a "prospectus," which contains information about the objectives, management, and financial condition of the issuer. In the absence of market information, investors should read the company's prospectus with special care to find out if the stocks are a good investment. However, the prospectus is only a description of the current condition of the company. The outlook of the start-up companies described in a prospectus often is very uncertain.

For more information about penny stocks. contact the Office of Filings, Information, and Consumer Services of the US. Securities and Exchange Commission, 450 Fifth Street. NW.. Washington. DC 20549. (202) 272-7440.

With the Securities and Exchange Commission cracking down on penny stocks, Merrill Lynch recently told its clients and financial advisers that it is putting restrictions on the purchase and sale of a large swath of low-priced securities.

According to a source familiar with the moves, as of July, clients were no longer able to buy penny stocks through Merrill Lynch, and by the end of September, will no longer be able to sell them through the brokerage. The stocks will still be able to be transferred to a different account at another broker-dealer.

In the world of finance, the decade of the 1980s will be remembered for its superlatives: the longest bull market, the steepest market plunge, the highest trade and budget deficits, the costliest corporate takeovers and the largest number of insider trading arrests. To this list of extremes, historians no doubt will add a chapter called "The Penny Stock Scandals," which will examine the most extensive outpouring of fraud, deception and abuse directed at American investors since the speculative frenzy of the 1920s. The cost to investors has been high. An estimated $2 billion a year has been taken from investors, including many elderly and retired investors whose financial security has been threatened by their losses. "Penny stock swindles are now the number one threat of fraud and abuse facing small investors in the United States," state securities regulators said in a report recently. Penny stock scams have risen dramatically in the last three years, according to investigators. The bull market of the mid-1980s created a climate in which investors were raking in money across the board, making it easy for penny stock brokers to sell their wares and their promises. Investors were becoming used to widespread advertising of new investment products. And the availability of cheap long-distance lines made it easy for brokers to mount telemarketing operations. Some penny stock scams have involved small, transient firms working out of motels. Others have involved large, multi-branch firms with hundreds of brokers in huge "boiler rooms." One major penny stock firm, the now defunct F.D. Roberts Inc. of New Jersey, even had ties to organized crime, according to the testimony of some of the firm's former officials. Dialing investors nationwide and working from carefully crafted scripts, and penny stock hawkers cajole, harass and embarrass investors into buying stocks in companies that have no business history, few employees, few assets and little prospects for success. Although penny stocks traditionally sell for less than $1 -- some as little as 10 or 20 cents a share -- stocks selling for less than $5 are often included in that category. Penny stocks involved in fraud cases are often found in the "pink sheets," a catalogue named for the color of the paper on which the list is printed each day. Although the pink sheet market lists many legitimate low-priced stocks, it is characterized by unreliable prices and wide gaps between what brokers charge to sell stocks and what they pay to buy them back. Penny stock scams take many forms -- from registered or unregistered brokers peddling dubious stocks to highly organized forms of market manipulation. The manipulators often use, as their vehicles, "shell" companies called "blind pools" or "blank checks." These are companies that sell stock to the public although they may have no clear business goals. Penny stock promoters arrange for the initial shares to be sold secretly to their friends or relatives. After the offering, the promoters reclaim the shares, try to create a wave of excitement about the stock, pump up the prices and sell and resell the shares to investors at twice or three times what they paid for them. When the brokers have made their money, they walk away. Since there was no real market for the stock to begin with, the price collapses, leaving investors with huge losses and brokers with fat gains. How can people be so gullible to buy stocks that they never heard of from brokers they never met? "They just get tempted," said Susan E. Bryant, the head of the Oklahoma Securities Commission. "The broker promises them a 100 percent return on their money and it's hard for them not to get involved." Bryant, who is president of the North American Securities Administrators Association, noted that the brokers tend to be persuasive and authoritative, making it difficult for investors to say no. "It's a mix of wanting to believe they can make that money and thinking that the sales pitches are legitimate," Bryant said. The sharp rise in investment fraud has been accompanied by wide-ranging efforts to tell consumers about the dangers of saying "yes" to persuasive telephone sales people selling high-risk or even worthless investments. "When you are dealing with penny stocks, you are dealing with the riskiest investment someone can make," said Joseph I. Goldstein, head of the Securities and Exchange Commission's penny stock task force. The scams have been tough to stop because the profit potential is enormous. Brokers in some firms reportedly make $10,000 to $20,000 a month while others have made as much as $50,000 a month, said Goldstein. The SEC task force was created by former SEC chairman David Ruder after it became apparent that penny stock scams, once limited to the Denver area, had become a national plague. The agency received 3,751 consumer complaints about penny stocks in fiscal 1989, up from 1,510 complaints a year earlier. Investors who testified at recent congressional subcommittee hearings on penny stock investments told lawmakers that their experiences cost them dearly. Milton S. Wenstrom of Salem, Ore., told the committee he invested $41,000, that he saved while in the Navy, with Blinder, Robinson & Co. of Englewood, Colo., and lost $33,000 of it on penny stocks that he claimed were purchased by a broker without his knowledge or permission. Blinder, Robinson, once the nation's largest penny stock firm, has long been the target of federal and state regulators investigating penny stock fraud. Lily and William Lynes of Powder Springs, Ga., said an excursion into penny stocks with a broker cost them their life savings. "His favorite expression was 'trust me.' We must have heard that a million times," said Lily Lynes, talking about the couple's investments with broker Charles Wilson at Stuart-James Co. in Denver. And trust him they did. But that trust, they claimed, cost them $13,000. The Lyneses also learned how hard it is to get one's money back once it is gone. They and five other Wilson customers attempted to sue Stuart-James and Wilson, who is no longer with the firm. Because they had signed a form agreeing to take disputes to arbitration, a judge refused to take the case. In November 1988, the investors filed an arbitration claim with the National Association of Securities Dealers (NASD), which operates the industry's major arbitration system. Stuart-James lawyers in Denver opposed the filing of a joint claim and an NASD panel recently ruled in the firm's favor, meaning that the investors will have to file individual claims. Attorney Steven J. Gard of Page & Bacek in Atlanta, who represents the Lyneses, was critical of the delay and said the rights of the investors had been "substantially prejudiced by the inability to bring the cases jointly." Stuart-James attorneys Marc N. Geman and Donald T. Trinen, who argued that the cases should stand on their own merits, said they will represent broker Wilson in any arbitration. Trinen also said the Lynes case comes down to a "swearing match" between the Lyneses and the broker over who said what. To combat the penny stock scams, the SEC has adopted new anti-fraud rules for penny stock firms that take effect Jan. 1. The agency also has distributed 2 million fliers warning investors to be wary of penny stock investments. The SEC task force, formed last year, has enlisted the help of U.S. attorneys, the Federal Bureau of Investigation, the Internal Revenue Service, the National Association of Securities Dealers and dozens of state regulators. The SEC, which filed 25 penny stock fraud actions in fiscal 1988, stepped up its efforts in fiscal 1989 and filed an additional 58 actions. One of its major civil actions, filed against Stuart-James Co., alleges the firm took excessive markups, or profits, on stocks, used fraudulent sales scripts and refused to buy stocks back from customers unless they could be sold to other customers. The charges have been hotly contested by Stuart-James. In Florida, the state has created its own task force to get rid of the penny stock swindlers. The Florida task force was formed after the Miami office of the SEC conducted a "sweep" of 19 penny stock firms and investigated their sales practices. Of the 19 checked, the SEC found serious violations of federal and state securities laws in 16. Since the Florida task force got underway, some 23 penny stock firms with 62 branches and 3,100 sales agents have ceased doing business in the state, according to the office of Florida Comptroller Gerald Lewis. Florida currently is trying to put Blinder, Robinson out of business in the Sunshine State, charging, among other things, that the firm manipulated the stock of Onnix Financial Group, marked up the shares as much as 112 percent and sold nearly 42,000 nonexistent shares, making $1.3 million in gross commissions for its brokers. The case is expected to be heard next summer. The New Jersey penny stock case involving F.D. Roberts Securities has provided investigators with one of the most detailed portraits yet of how penny stocks are manipulated and how the swindlers get rich at the expense of investors. Federal prosecutors have received guilty pleas from 17 individuals associated with F.D. Roberts, a Paramus-based firm that has been put out of business. As the individuals entered their guilty pleas, they described their roles in the manipulation of stocks and the bilking of investors. One of the guilty pleas came from the former president of F.D. Roberts, Sheldon G. Kanoff, a former SEC chief compliance examiner in the New York regional office. F.D. Roberts allegedly made $67 million in gross trading profits in the three years ended in 1988, almost all of which came from markups on securities sold through its "boiler room" operations. The misuse of blind pool and blank check offerings, which must be registered with the SEC, has led to an industry discussion of whether they should be outlawed and whether a ban would hurt legitimate small companies trying to raise capital. The SEC's Goldstein said that his agency had brought a number of enforcement actions against firms that have used blank check companies for market manipulation. Meanwhile, he added, "The commission is looking to see whether blank checks are a legitimate vehicle for capital raising. If not, the commission will take appropriate regulatory steps to address the problems attributed to blank check offerings." The SEC's new anti-fraud "cold call" rule takes direct aim at the high-pressure tactics used by unscrupulous penny stock brokers. The new "cold-call" rule will affect firms that get more than 5 percent of their revenue from dealing in unlisted stocks priced at less than $5 in compani


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