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The stock market offers countless options to investors and to the companies issuing equity to the public. Among those choices is where to list securities for trading. Issuing companies might not be qualified to list shares on a formal stock exchange where traditional regulation and recognition can be attained. Instead, issuers could list shares in the over-the-counter market where a new issue becomes a bulletin board stock for investors to trade. Regulation is less pervasive, price assurance is more opaque, and fraud has a greater chance of happening in the over-the-counter market.
Any investor would benefit from selecting the next growth stock that delivers future profits from a company that continues to generate greater profits. A bulletin board stock might offer the perception of a company that will become the next industry leader. Investors are often attracted to the prospects of such an investment because the price for a bulletin board stock can be extremely cheap. There are severe risks associated with such investments, however, and market experts often suggest investors be wary of these securities.
Chief among the risks associated with a bulletin board stock is the possibility for fraud. Lighter regulation alone makes it easier for investment scams to occur. A stock that is listed on a major exchange, such as the New York Stock Exchange, Euronext, or the Nasdaq Stock Market in the U.S., must adhere to specific listing requirements in order to sell shares on these platforms. Those same standards do not exist in the over-the-counter market. In fact, a company that once met the listing requirements of a major exchange but later fails to meet those same standards over a period of time is typically delisted from the exchange platform and falls to bulletin board status to trade in the over-the-counter market.
Given that the price of a bulletin board stock tends to be cheaper in comparison with a security that lists on a major exchange, the possibility is greater for fraud. For instance, unethical market participants might purchase a bulletin board stock in high quantities to illustrate high demand for this security to other investors. Subsequently, other investors might invest in the stock, thus driving up the price further based on the presumption that there is high demand and the price will continue to rise. Meanwhile, the fraudulent individual is able to sell high quantities of the cheap stock and profit from the transaction, leaving other investors with little recourse.
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