"What does 2016 hold for penny stocks?" is a terrible question to be asking yourself. Penny stocks -- securities issued by very small companies that trade at less than $5 (often much less) -- are a breeding ground for fraudsters and unscrupulous operators. Once you know this, the proprer rhetorical question is: "Why would I be interested in penny stocks, and should I get my head examined if I am?"

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Author: TaxRebate.org.uk. Re-published under CC BY 2.0.

If, for whatever reason, you are interested, the good news is that there is still time for you to step away from the financial abyss that is the penny stock "market". But to return to the original question regarding what 2016 holds, the answer is deceit, fraud, predictable investor losses, and, in some cases, ruin. Does that paint a vivid enough picture?

If you want to know what next year holds for penny stocks, all you have to do is to look at what transpired in 2015 -- 2016 will be no different. Here are some press releases that the Securities and Exchange Commission (SEC) issued this year:

January

  • SEC charges stock-based lender with selling billions of penny stock shares as unregistered broker-dealer

March

  • SEC suspends trading in 128 dormant [penny stock] shell companies to put them out of reach of microcap fraudsters

June

  • SEC charges microcap promoter with illegally selling penny stock shares

July

  • SEC charges three penny stock promoters behind pump-and-dump schemes

December

You get the idea.

Let me be quite clear: Penny stocks are not considered a legitimate class of investment. There is no penny stock index, for example. I don't even consider them a legitimate form of speculation.

(There are, however, microcap indexes, which have performed well. All penny stocks are microcap (or nano-cap) stocks, but not all microcap stocks are penny stocks. Seventy percent of the stocks in the Russell Microcap Index are priced above $5 and nearly half trade at more than $10, according to data from Bloomberg.)

Most penny stocks trade on the over-the-counter market, i.e. away from an organized exchange. As such, one ought to heed the following warning from the SEC (emphasis in the original text):

Penny stocks are low-priced shares of small companies. Penny stocks may trade infrequently -- which means that it may be difficult to sell penny stock shares once you have them. Because it may also be difficult to find quotations for penny stocks, they may be impossible to accurately price. Investors in penny stock should be prepared for the possibility that they may lose their whole investment.

Furthermore,

While companies that trade their stocks on major exchanges undergo a formal application process and must meet minimum listing standards, companies quoted on the OTCBB or the OTC Markets do not have to apply for listing or meet any minimum financial standards.

Under these circumstances, it's easy enough to see why fraudsters find penny stocks well-suited to their trade.

If you're considering putting money into penny stocks, you're better off flying to Vegas and playing craps with that money. You'll know from the outset that you are gambling, and although the house odds are unfavorable, at least the house respects the rules it sets. And in Vegas, you might have some fun in the process; I doubt that penny stock speculators can say the same.

If you are still considering putting money into penny stocks, I urge you to carefully read the following documents on the Securities and Exchange Commission's website:

Reading them could save you a lot of money and heartache. If you have dabbled in penny stocks before, make 2016 the year in which you put an end to that bad habit, and if you never have don't let 2016 be the year you start! One of P.T. Barnum's rivals once quipped that "there's a sucker born every minute" -- in this instance, let that sucker be someone else.

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