- The New York Stock Exchange.stock exchange image by Christopher Walker from Fotolia.com
The U.S. Securities and Exchange Commission (SEC) was established in 1934 as an independent agency. The agency's job is not only to oversee the many financial markets but also to draft rules to protect part-time and amateur investors from large financial losses that may be out of their control to prevent. The SEC has made it possible for part-time investors to gain access to information to which heretofore only the Wall Street elite had access. - Many young traders view penny stocks as a way to get started in the stock market. They are often drawn to these stocks because they're cheap. The SEC defines a penny stock as a stock listed under $5 and that is a speculative security from a very small company. Many beginning investors don't realize that these stocks are often cheap because they're dangerous. Because of this, the SEC has drafted a series of rules to protect the beginning investor. Among these rules, the broker selling these stocks must first approve the buyer for the transaction. He or she must also warn the investor of the potential risks of penny stock investing as well as send them monthly statements.
- An opinion widely held in the investment community is that a major contributing factor to the financial meltdown of 2008 and 2009 was the practice of short selling, in particular, a type of short selling known as naked short selling. Naked short selling occurs when an investor short sells stock without the broker locating the shares to borrow. In July 2009, the SEC made permanent an emergency rule enacted banning the use of naked short selling. While the SEC continues to seek comments on this issue, as of 2010 the rule in place states that a broker must either purchase or borrow shares of stock if he cannot locate shares to borrow for an investor wishing to short sell.
- The SEC has many publications available educating investors on the dangers of day trading. Because the SEC has researched day traders and found that the majority lose money year over year, the commission has developed rules that both protect investors and help to maintain the integrity of investment markets. The SEC defines a pattern day trader as an individual who both buys and sells a single security in the same day for at least four of five consecutive days. Once an individual is defined as a pattern day trader, she must maintain at least a $25,000 account balance and may trade only on margin.
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