Penny Stocks are company stock offered on the Over-The-Conter Bulletin Board (OTCBB). OTCBB is an electronic system for selling certain SEC compliant securities that are not listed on NASDAQ or another national securities exchange. These Penny Stocks on OTCBB include smaller companies, foreign companies, and other unique financial products. The stocks are typically less stable than stocks listed on NASDAQ or the NYSE and have less stringent trading and reporting requirements.
An IRA may invest in penny stocks and in doing so you’ll generally work with a broker-dealer who allows their clients’ IRAs to invest into OTCBB securities (aka “Penny Stocks”). Many brokerage firms, such as TD Ameritrade, E-Trade, and Scottrade have IRA brokerage accounts that can invest into Penny Stocks. You may also use a IRA with a self directed custodian but generally a brokerage IRA works best as you’ll need a broker to execute the trades. It is important to note that just because you can invest in Penny Stocks with your IRA doesn’t mean that you should. My mantra on investing, if I can say that I have one, is to invest in what you know. This mantra shared by many of our clients who self directed their retirement accounts into real estate or into start-up companies with promising futures where the IRA owner has specific knowledge of the quality of the owners/management or in their products. In other words, they invest into assets they have knowledge in. So, if you see opportunity to invest into penny stocks with your IRA, keep in mind that it is a possibility but proceed with caution.
When investing in Penny Stocks with your IRA, you should pay careful attention to the following concerns.
1. Commissions – The commissions paid on the selling of “penny stocks” can be significant. Check to see what commissions are being paid on the penny stocks you are interested in acquiring.
2. Substantial Risk – Be prepared to sign lots of disclosures indicating that you understand the risk in acquiring these types of securities as all brokerage firms make you sign documents indicating that you know what you are doing.
3. Penny Stocks May Be Easy to Buy But Can be Hard to Sell – Because the trading volume is lower on OTCBB securities than securities on the NASDAQ or NYSE, it may be difficult to sale your Penny Stocks. If you hold a significant number of shares you may need to sell the shares over time to avoid having a drop in price on the shares you are selling.
In summary, Penny Stocks may be acquired by an IRA but an investor should take significant caution and should only invest after conducting adequate due diligence on the company stock being purchased. Because the reporting information required on Penny Stock companies is limited, this takes additional effort from the investor.
By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook