Investing In Penny Stocks: Scrutinizing EDGAR

Penny stocks used to carry a derogatory label because of several dubious companies that flourished in the market in the early 2000s. Now that Pink Sheets has created the OCTQX classification, companies trading penny stocks must now disclose corporate information if they wish to spark investor interest.

The key to a successful penny stocks investment is to know where to put your money. And one of the best resources to learn about a penny stocks company is the SEC.

Before investing in penny stocks, make sure you dissect an issuer's EDGAR filings. EDGAR short for Electronic Data Gathering, Analysis, and Retrieval is a database for SEC filings required for publicly traded companies, including penny stocks listed with the OCTQX and the OTCBB. The two most important documents you need to analyze are Forms 10-K and 10-Q.

Annual Report Form 10-K

Form 10-K is divided into two parts. Part 1 includes these items:

1. A description of the company's main business and services or products, including manpower size, the effects of any environmental and regulatory issues, projected cost of research and development, as well as any material proceedings that the company may be involved in.

2. A brief description of the company's operations as well as per share income and payments for each of the last five fiscal years.

3. An inventory of properties, equipment, plants, assets, significant capital properties, and leases.

4. A list of all the subsidiary companies, as well as the percentage of voting securities that each company owns.

5. Legal proceedings, which include any conflicts that may result in material litigation or any pending court cases.

6. Information on each security class, including increases or decreases in outstanding securities.

7. A record of all the shareholders for each type of equity security.

8. A list of all corporate executive officers, their positions and offices, and family relationships among them.

9. A declaration of any arrangement under which any director or officer is insured against legal responsibility, as well as the ranks and duties of these directors or officers.

10. A list of all financial statements prepared and submitted by the company that have been reviewed by its auditors.

The second part of Form 10-K includes:

1. A list of all investors with at least 10 percent share or more of any type of securities. The list should also include securities held by officers and directors, listed by division, and the amount and proportion each one owns.

2. A list of names, offices, term of office, and the business background of every director and officer of the company.

3. A list of all the top three highest-paid officers of the company, as well as all directors. All total fees and salaries paid to all directors and officers must also be disclosed.

4. Stock options that were given to the company management and employees. The list of options granted must be shown from the beginning of each fiscal year, and should be detailed through a chart, graph or table.

5. A statement of any important transactions that involve assets, savings, pension, retirement, or loans to the directors and officers.

Quarterly Report Form 10-Q

Every quarter, penny stocks companies are required to submit a form called 10-Q, which must be filed within 45 days of the end of each quarter. These reports do not have to be reviewed by the company auditors, but are required to be factual and accurate. Basically, this serves as a quarterly update on the information in the company's annual report.

These SEC reports can be helpful when looking for penny stocks that have potential so familiarizing yourself with EDGAR filings should be a crucial part of your due diligence.

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