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Tracking Penny Stocks

If I have shares of penny stock and the Nasdaq drops it, how would I keep up with it?

Let's face it: By the time a stock is dumped from the Nasdaq, it has a lot more in common with a buffalo chip than a blue chip.

Last year 440 stocks were delisted from the Nasdaq. Among other reasons, the exchange will drop a company (with more than $4 million in assets) if it fails to meet a minimum bid price of $1 for more than 30 consecutive days. (For more, see our story.) So far this year, 65 have been given the boot, and the list includes some familiar names, like Bradlees (BRADQ) and eToys (look for quotes under the symbol "ETYSQ"), both of which have filed for bankruptcy protection.

Once a stock is dropped from a major exchange like the Nasdaq, it often ends up being listed on the OTC Bulletin Board, which is run by the National Association of Securities Dealers, or NASD. The NASD has been cleaning up the Bulletin Board, requiring listed companies to submit quarterly and annual reports to the Securities and Exchange Commission and to have at least two market makers, says Wayne Lee, a Nasdaq spokesman. (The NASD also runs Nasdaq.) But these requirements are far less stringent than those for listing on the major exchanges. For companies that can't meet even the Bulletin Board's demands, there's the last refuge of a penny stock, the Pink Sheets.

But even if you can find a way to track a penny stock, the truth is you probably don't want to. "The number of outright frauds is so substantially higher than fully listed securities that the odds of stepping on a land mine are high," says Stephen Barnes, a certified financial planner at Barnes Investment Advisory in Phoenix. "I would challenge anyone to find a reputable adviser to suggest that there are reasonable investment opportunities there." The NASD advises that you shouldn't invest in penny stocks unless you're prepared to lose your entire investment.

Of course, you may not have had a choice in the matter. After all, the folks who bought Bradlees at $21 had no intention of investing in a penny stock. Since it sounds like the stock you're holding is moving in the wrong direction, you might want to consider cutting your losses and taking the tax break instead. One problem: Selling penny stocks at a good price can be notoriously difficult, since the spread between the bid and the ask (i.e., the price at which somebody would be willing to buy vs. the price at which you'd be willing to sell) can be substantial. Indeed, you might have a hard time selling your shares at all.

Of course, since your stock hasn't yet been delisted, you probably don't have to worry about lack of liquidity quite yet. Instead, ask yourself, if you had to do it again, would you buy this stock today? And at today's prices, is this stock a screaming bargain? If you don't still fully believe in this company, move on. Truth is, most penny stocks aren't worth the pennies they trade for.