You may have a difficult time finding a traditional broker that will allow you to short sell penny stocks. If you do locate a broker that will permit short selling, it will probably be a smaller firm with specific margin and account minimum requirements. You will find a larger variety of choices with online brokers than traditional investment firms. You are more likely to find a broker that allows shorting penny stocks this way, but major online brokers such as eTrade and TD Ameritrade still prohibit short selling of over-the-counter stocks, which rules out most penny stocks.
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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Tens of thousands of small and micro-capitalization companies are traded over-the-counter around the world.
In most cases, they're trading OTC because they don't meet the stringent listing requirements of the major stock exchanges. Many companies that trade over the counter are seen as having great potential because they are developing a new product or technology, or conducting promising research and development.
Others trading OTC were listed on an exchange for some years, only to be later delisted. If the company is still solvent, those shares need to trade somewhere.
Penny stocks have always had a loyal following among investors who like getting a large number of shares for a small amount of money. If the company turns out to be successful, the investor ends up making a bundle. If it doesn't, the loss is, hopefully, a small one. Potential investors should be aware that these companies are not required to provide a lot of information about their finances, their business operations, or their products, as is required for companies listed on the regulated stock exchanges.
It's important to take their statements with a grain of salt and do your own research. The first step an investor must make before trading OTC securities is to open an account with a brokerage firm.
If you're going with an online discount broker, check first to make sure it allows OTC trades. If you go with a real-world full-service brokerage, you can buy and sell OTC stocks.
The broker will place the order with the market maker for the stock you want to buy or sell. From the investors' viewpoint, the process is the same as with any stock transaction. As usual, they can place limit or stop orders in order to implement price limits. Although short selling is allowed on securities traded over-the-counter, it is not without potential problems.
These stocks generally trade in low volumes. That makes them Illiquid. An investor trying to cover an unprofitable short position could get stuck. OTC securities also have been the focus of pump and dump schemes. Con artists use social media and email to heavily promote a thinly-traded stock in which they have an interest.
This can create a high spike in the price of the stock. The con artists grab their profits and everyone else loses money. These schemes often use OTC stocks because they are relatively unknown and unmonitored compared to exchange-traded stocks.
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