One of the most important consumer tips is know what you are buying. This maxim certainly applies to investing in stocks. There are well over 20,000 companies whose shares trade either on a U.S. exchange or over-the-counter. FINRA is issuing this alert to caution investors that, with so many companies and trading symbols, there is ample room for confusion—and good reason to carefully research any investment before making a purchase.
If you are thinking about investing in individual stocks, these tips can help you understand what you are buying and avoid potentially costly mix-ups or mistakes.
1. Research the company. Do your homework by thoroughly researching the company before you purchase stock in it. A good place to start is SEC's EDGAR database:
• For publicly traded companies, EDGAR provides a wealth of information including registration statements and prospectuses. You can also find periodic reports that publicly traded companies are required to file and information about recent corporate events.
• For information pertaining to private companies, see FINRA’s Investor Alert on Private Placements.
|Tips: Just because a company has registered its securities or has filed reports with the SEC does not mean it will be a good investment—or the right fit for you. Also, be aware that not all financial information filed with the SEC, or published elsewhere, is independently audited. Unaudited financials are just that—not reviewed by an independent third party. |
While the information superhighway has made it easier than ever to research a stock, it’s also home to misinformation. Verify any information you have heard about a company against the company’s public filings.
2. Find out where the stock trades. Many stock information services provide the market or quotation system where the stock is listed or quoted over-the-counter. Once you know where a stock trades or is quoted, keep in mind the following:
• The NASDAQ Stock Market (NASDAQ OMX), the New York Stock Exchange (NYSE Euronext) or other registered national securities exchanges generally have defined quantitative standards for issuers to list their securities on these exchanges.
• In general, there are no minimum quantitative standards that a company must meet to have its securities quoted over-the-counter. Many of the securities quoted over-the-counter trade infrequently and may be volatile (the price can move up or down substantially during a short period of time). This may make it difficult to sell your security at a later date at a desired price.
3. Make sure you are buying the intended security. U.S. common stock symbols can contain up to five letters and might resemble the name of more than one company. In addition, symbols can be changed or reassigned. When placing an order, make sure that the symbol you enter corresponds to the company whose shares you intended to purchase.
• Some investors recently may have bought shares of the bankrupt company TWTR, Inc., formerly Tweeter Home Entertainment, which traded over-the-counter under the symbol TWTRQ, mistaking it for Twitter, the private, high-profile social networking firm that has filed a registration statement with the SEC that it intends to offer securities to the public in the future.
• Shares of Tweeter Home Entertainment were halted by FINRA on October 4. To avoid further confusion with Twitter, on October 8 FINRA also changed the symbol for Tweeter to THEGQ (THEGQ).
4. Mind your "Q"s. A fifth letter "Q" at the end of a stock’s trading symbol often denotes bankruptcy status of the quoted company. Securities of a company in bankruptcy may continue to trade after the company has filed for bankruptcy protection and before it emerges from these proceedings. However, investors should not interpret that as indicating the shares have any value. In other words, "Q" is for caution. However, investors should not interpret that as indicating the shares have any value. In other words, "Q" is for caution.
5. Understand the IPO Process. An initial public offering, or IPO, is a way for a company to raise capital by selling shares of its stock to the general public. There are a number of steps in the IPO process that must be fulfilled before the public can purchase shares. And, while there are permissible ways for some categories of investors to purchase unregistered shares in a private company before its IPO, FINRA has cautioned investors to be extremely wary of pre-IPO speculation. It is always risky, and can be illegal.
Fundamental research and an understanding about the way in which stocks are listed and traded can go a long way toward helping you make sound investment decisions.For more information, see FINRA's Investor Alert, Stock Up on Information Before Buying Stock.
Gerri Walsh is Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA).
FINRA is the largest independent regulator for all securities firms doing business in the United States. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets. FINRA does not endorse, sponsor, or guarantee, nor is it sponsored by, any advertisers on this site, and any dealings with those advertisers are solely between you and the advertisers.