Business Life Cycle<\/span><\/strong><\/h2>\nJust like a baby grows up to be an adult, a business grows too. A child outgrows its toys, clothing and needs. A business outgrows its equipment, office space and management team. At some point a huge investment is needed to set the long-term course for the business. In life we call this college. In business this significant investment in growth can no longer be funded by the closely held owners. The business must seek funding from other sources.<\/span><\/p>\nMost businesses utilize the angel investor network or venture capitalists to fund this important step in maturation. Naturally the investment capitalists are merely a temporary step as they desire their money back with a reward. This is accomplished by transitioning the ownership from privately held status to a publicly owned business. The company is ready to transition to the stock market.<\/span><\/p>\nStock Markets<\/span><\/strong><\/h2>\nThe stock markets are governed by the Securities and Exchange Commission (SEC). In addition each market has its own set of rules and minimum requirements to join. The following is a list of the respective markets and some of their minimum standards to participate. Penny stocks exist in all of them but it doesn’t necessarily make that business a sound investment.<\/span><\/p>\nNew York Stock Exchange<\/span><\/strong><\/h3>\nWithout a doubt this exchange has the greatest amount of equity investment in the world. It is one of the oldest exchanges and the most prestigious too. Their requirements for membership are demanding and difficult for penny stock companies to comply. One of the requirements is a minimum share price of $1.00. Membership fees are expensive and compliance is costly. It is rare to find penny stock companies trading on this exchange, most that are trading were robust at one point and are having difficulties maintaining their status on this exchange.<\/span><\/p>\nAmerican Stock Exchange<\/span><\/strong><\/h3>\nThis exchange is where investors find better quality penny stocks. This exchange has high standards of conduct requiring minimum share trading volume, a threshold of unique investors, minimum capitalization and reporting standards. For penny stock companies this is the big league for play.<\/span><\/p>\nTo assist the reader in understanding penny stocks, the following are the definitions of the various capitalization levels.<\/span><\/p>\nMarket Capitalization<\/span><\/strong>\u00a0<\/span><\/p>\nMarket capitalization is simply the numbers of share outstanding (held by investors) times the market price. Thus, a share trading at $70 each with 70,000,000 shares means the capitalization value is $490 million. Companies are grouped by their capitalization value and assigned a category.<\/span><\/p>\nCategory<\/span>\u00a0<\/strong> \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0Value<\/span>\u00a0<\/strong> \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Examples<\/span><\/strong><\/span>
\n Large Caps\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0> $5 Billion \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Wal-Mart, Exxon-Mobile, GE<\/span>
\n Mid Caps \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 > $500 Million < $5 Billion \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Large Shipyards, Kraft Foods, Airlines<\/span>
\n Small Caps \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 > $50 Million < $500 Million\u00a0 \u00a0 \u00a0 \u00a0 Technology, Manufacturing<\/span>
\n Penny Stocks \u00a0 \u00a0 \u00a0 < $50 Million<\/span><\/p>\nNASDAQ<\/span><\/strong><\/h3>\nNASDAQ refers to the National Association of Securities Dealers Automated Quotations. This market exchange has a wide variety of all the various levels of capitalization identified above. The requirements are still strict but the costs of membership are significantly less than the two upper exchanges. The bulk of good penny stocks are found on this exchange.<\/span><\/p>\nThis exchange actually uses tiers or levels of trading and there are minimum share prices for trading to maintain status on that tier. For those penny stocks unable to maintain these minimums, NASDAQ requires the company to participate in its over the counter exchange.<\/span><\/p>\nOver the Counter (Bulletin Board)<\/span><\/strong><\/h3>\nThis is the most common exchange used by penny stocks. It still has minimum requirements to participate and most companies can easily meet the tests.<\/span><\/p>\nAs stated above it is owned by NASDAQ and all participants must still comply with the federal regulations. The problem here is that often people confuse this exchange with the simple over the counter trading.<\/span><\/p>\nOver the Counter Trading<\/span><\/strong><\/h3>\nThese types of shares are traditionally publicly offered by significant ongoing businesses but restrict their activity to within state boundaries so as not to violate federal law or regulations. Usually only those with money receive a prospectus relating to a stock offering for over the counter shares.<\/span><\/p>\nThis is a common tool when small local banks start-up or desire to expand in neighboring districts.<\/span><\/p>\nRisk<\/span><\/strong><\/h2>\nThe most important issue of penny stocks for an investor to understand and appreciate is the greater risk associated with this type of investment. Unlike well established operations, risk with penny stocks exist in every aspect of business.<\/span><\/p>\nImmature Existence<\/span><\/strong><\/h3>\nAlmost all penny stocks trading on the market trade for young inexperienced companies. Unlike the large caps at the other end of the market capitalization spectrum, penny stock companies have younger and immature management, lack of history and a product or service that may not hold favor with the consumer. The best comparison is David and Goliath. Unlike the biblical result, Goliath almost always wins in business.<\/span><\/p>\nLower Reporting Standards<\/span><\/strong><\/h3>\nMid caps and large caps have extensive legal and accounting professionals to ensure the highest level of compliance reporting as required by the two bigger exchanges and the federal government. Penny stock companies lack this professional depth due to cost and inexperience. Therefore the quality of information streaming out to investors from penny stock companies leaves a lot to be desired by potential and existing investors. This lack of information creates a heightened sense of distrust and greater extreme reactions to any set of news. These lower reporting fundamentals add to greater volatility in share price.<\/span><\/p>\nLow Trading Volume<\/span><\/strong><\/h3>\nOne of the many drawbacks of penny stocks is the low volume of trading and number of unique shareholders. This lower volume makes the stock susceptible to price manipulation. This includes pump-and-dump schemes. The core problem is that low quality companies trade in lower standard exchanges. These exchanges don’t require extensive reporting compliance plus federal regulators are more likely to ignore illegal activity or problems because the SEC is overwhelmed with issues in the larger markets.<\/span><\/p>\nStock Price Volatility<\/span><\/strong><\/h3>\nBecause there is low volume and limited number of investors any news about the company creates unreasonable reactions from the investors. The price per share swings can reach 20% frequently causing heartache for investors.<\/span><\/p>\nLawsuit Mania<\/span><\/strong><\/h3>\nOne the most troublesome aspects of any new business is protecting your rights especially legal ownership such as patents and copyrights. Lawsuits abound at this level most often preventing the company from gaining a foothold with market share. Several lawsuits can cost millions of dollars wiping out young companies.<\/span><\/span><\/p>\nInvestment Requires Sophistication and Patience<\/span><\/strong><\/h2>\nIf you are looking for a quick buck, penny stocks is not the best course of action. To be honest I have yet to see a legitimate get rich quick scheme that works.<\/span><\/p>\nIf you desire to invest in penny stocks, read, read and read some more. Get sophisticated in a particular industry, learn how to read financial statements and have patience. It took Warren Buffet more than 30 years to become a billionaire and that was with regular stocks. This site provides the basic business principles used by business; so read, read and read some more.<\/span> ACT ON KNOWLEDGE<\/strong>.\u00a0<\/span><\/span><\/p>\n