What is 'Cats And Dogs'

"Cats and dogs" is a slang term referring to speculative stocks that have short or suspicious histories for sales, earnings, dividends, etc. The origin of this term may lie in the use of "dog" to refer to an underperforming stock. In a bull market, analysts often mention everything is going up, even the cats and dogs.

BREAKING DOWN 'Cats And Dogs'

Cats and dogs, or speculative stocks, are often called penny stocks. Investing in cats and dogs may create a large financial gain or loss in a short amount of time, depending on how the stocks perform.

Characteristics of Cats and Dogs

Cats and dogs are offered by small companies that are raising equity capital. The low-priced shares trade infrequently over the counter (OTC) rather than on a stock exchange. Investors may have difficulty in finding price quotes and information on these companies and their shares. The Securities and Exchange Commission (SEC) warns investors they may lose their entire investment when conducting business with such corporations.

Risks of Investing in Cats and Dogs

Obtaining reliable data and information about cats and dogs is difficult. The SEC, which oversees publicly traded companies, only has financial reporting requirement companies that have over $10 million in assets and more than 500 registered shareholders. So, most cats and dogs companies do not file financial statements. That makes it easy for con artists to provide investors with false information regarding these businesses.

Because cats and dogs are too small to be listed on a stock exchange, their shares trade through an electronic OTC quotation system such as  Pink Sheets. Unlike major exchanges, Pink Sheets does not have requirements such as full reporting, SEC filings, a minimum price or market capitalization. However, legitimate and sound companies also trade on Pink Sheets, so investors need to thoroughly research companies before investing in them.

Sometimes, cats and dogs may be sold due fraudulently as part of a “pump and dump” scheme. The perpetrators of the scheme present overly optimistic or misleading claims about a company’s prospects via email, news releases or online message boards with the aim of inflating, or pumping up, the stock’s price by bringing in new buyers. Because such stocks trade infrequently, a small rise in purchase activity may cause a potentially large price increase. The sources of the exaggerated information then sell, or dump, their shares, typically at a large profit. Investors often do not recoup their losses.

Example of Cats and Dogs

Stephen Roebuck, a stock broker, and Daniel Kaiser, the chief technology officer of VMT Scientific, took control of the Nevada-based shell company in 2005. The duo issued 120 million shares of stock to Roebuck and transferred them to offshore brokerage accounts, according to the SEC. Roebuck and Kaiser then promoted the company through news releases and a website, making false claims about VMT’s medical "breakthrough" product, saying it could cut the chances of diabetes-related amputations. When the stock price soared following the false news, Roebuck sold, or dumped, over 9.5 million shares for almost $1 million, the SEC said. In reality, the product didn't exist and the company, which was under court custody, had no revenue or operations.

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