Can Institutions Trade Penny Stocks?
A recent post by Spencer Israel on Benzinga looked at “3 Myths About Penny Stocks.”
One of the myths was that “Institutions cannot trade penny stocks.”
Israel writes; “Many people assume that the penny stock market is made up entirely of retail traders and that institutions are prohibited from participating in the market, but this is actually not the case. This myth may have gained credence based on historical restrictions or prohibitions on OTC stocks, but these are no longer true. Institutions follow opportunity—be that in penny stocks or larger, more liquid securities.”
While many small/micro-cap professionals may have heard that institutions can’t trade their stocks. Often, institutions can trade these stocks but the avoid them.
Institutional Investors don’t trade most penny stocks for 4 reasons:
Minimum Market Cap. “Many funds will have a minimum market cap requirement, and even where this is not an official policy, we often find that fund managers draw their own line in the sand.”
Liquidity Concerns. Many fund fear getting stuck in an illiquid holding.
Corporate Governance. Institutional funds are concerned with poor levels of corporate governance and disclosure among microcaps, “a perception reinforced by high profile corporate scandals.”
Materiality. No matter the size of investment, fund managers must perform a similar level of due diligence for each investment. The size of microcaps compared to the size of most institutions means a meaningful investment cannot be made.
Learn more HERE.