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Account Statements for Penny Stock Customers

Instructor: Tonya DiGiuseppe

Tonya Digiuseppe has over 30 years experience in accounting, bookkeeping and finance. Tonya has a bachelors degree and possesses a CPA and CFE designation.

This lesson will describe the purpose of monthly account statements for penny stock customers and certain SEC requirements, specifically regulation 156-6, Account Statements for Penny Stock Customers.

What is a Penny Stock?

So you want to invest in penny stocks. You heard they are a cheap investment and a low risk way of playing in the stock market, right?

Well, penny stocks are highly speculative investments that are traded infrequently and through over-the-counter (OTC) markets. Thus, if an investor wants to sell, there may not be a buyer to purchase. Penny stocks therefore have high illiquidity, meaning the investor may not be able to turn their investment into cash. Penny stocks are typically less than $5.00 per share.

Trading in penny stocks can provide large gains but can also cause large losses. Because penny stocks carry high risk, Congress requires brokers-dealers to comply with certain Securities Exchange Commission (SEC) requirements. These requirements are designed to educate the investor before making investment decisions and to keep them informed of their purchases and sales.

Example

John has decided to dip into the penny stock market. He finds out they are mostly traded on the OTC market, does some research, and decides on a pharmaceutical company that is developing promising vaccines. We will call this Pharma Promise Company. John contacts a broker named Stella.

Stella knows that John has never purchased penny stocks before, so she is required to send a document to him that describes the high risks, the market value of the stock, and the fee that Stella will be paid to execute the trade. John must sign and return the form, indicating his receipt of the document and understanding of the risk.

Then, Stella needs to approve the transaction and make sure the investment fits John's strategy. John is now a proud owner of Pharma Promise Co. He purchased 100 shares at $1.00 for a total of $100.00.

John monitors his investment regularly. Most of the time he can see the market value of the stock, but if Pharma Promise Co. stock is not traded, he may not see the value on a certain day.

Broker-Dealer Monthly Account Statements

Besides monitoring his investment on his own, John is assured he will receive monthly statements from Stella.

Broker-dealers must send monthly account statements to penny stock customers that shows the number of shares of each stock and the market value of each customer's penny stock investments. If a market value is not readily available, the broker must provide a reasonable estimate.

The SEC requires a document titled 'Important Information on Penny Stocks' to be distributed and, if sent in paper form, can not be longer than two pages. In addition, the SEC states that investors cannot be charged any additional fee for the required documents in the monthly statements.

The purpose of the monthly statement is to keep the customer apprised of the market value on a timely basis, so they can make timely decisions on their investment if desired. The monthly statement can be sent online, sent in paper form in the US mail, or in an email with a link to the SEC.

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