I can't even trade penny stocks at my brokerage. Why not?

What a penny stock is: a penny stock is a stock that lists at less than $5. This number is according to the SEC, some consider penny stocks to be anything less than $1. The price does not matter, the real thing is simply that they are traded in OTC markets, on pink sheets, not on any major stock exchange.

The fact that they are not traded on a major stock exchange can sometimes be problematic for those who want to invest in penny stocks, as for some they can't use their current broker.

If you find yourself saying: "I can't even trade penny stocks at my brokerage. Why not?" This article is for you. It will explain some of the fundamentals behind penny stocks, and why their very nature makes them a bit of a turn off to brokers, so much so that some brokers won't even trade them.

Not all stock brokers deal with penny stocks for a variety of different reasons. Many stock brokers will not cover them because of the difficulties in tracking them. Some penny stocks trade so rarely and at such low levels that there isn't a real market in them. So, brokers don't even try to deal with them. However, most brokers do not deal with penny stocks simply because of the inherent problems that come with them, and thehuge misunderstandings people have about penny stocks. So, let's take a look at this:

Problem one: Lack of Information Available to the Public
A broker may not deal with penny stocks because of the fact that they are traded on pink sheets. Companies listed on the pink sheets are not required to file with the SEC and are thus not as publicly scrutinized or regulated as the stocks represented on major stock exchanges. This means that many people invest in them without knowledge or with poor knowledge from sources that are not credible. Brokers do not want to get involved with these problems, so they opt not to trade such stocks.

Problem two: There are No Minimum Standards
Penny Stocks do not have to fulfill minimum standard requirements to remain on the exchange. Minimum standards act as a safety cushion for investors and as a benchmark for some companies, without them, investments are risky. Like the problem mentioned above, brokers just don't want to get into it.

Problem three: Lack of History
many penny stock companies are newly formed, or almost bankrupt, and thus have a poor track record or none at all. This lack of history makes picking a good penny stock difficult.This is a problem many brokers do not want to deal with.

Problem four: Liquidity
Penny stocks do not have much liquidity, so they often cannot be sold, or must be sold for a low price, and thus are a prime target for pump and dump stock scammers. A large proportion of all penny transactions are charged by brokers as principle transactions, or in other words,the broker is not paid any commission but rather makes its money on the spread, and by buying and selling at advantageous times. If the stocks won't sell, what is the point?

As you can see there are some real problems with penny stocks that act as a turn off for brokers, and thus many brokers choose not to trade penny stocks at all. However, there are brokers out there that do deal with penny stocks, and there are even some online brokers that specialize in penny stocks. So, if you find a penny stock you like, don't worry, you will be able to find a broker to help you buy it.