What Are Cats and Dogs?

"Cats and dogs" refer to speculative stocks of companies that may be engaged in questionable business practices. Such shares are often traded over-the-counter (OTC) and are subject to limited oversight by regulators. As such, investors in such companies may be at an elevated risk of fraud.

The origins of the term may lie in the use of "dog" to refer to an underperforming stock. The phrase is often used in bull markets to signify that buying activity has become speculative, as in "everything is going up, even the cats and dogs."

Key Takeaways

  • "Cats and dogs" refers to stocks of companies that engage in shady business practices and are traded on a speculative basis.
  • They typically trade over-the-counter (OTC) without much regulatory oversight.
  • Cats and dogs are often penny stocks—shares of companies with small market caps and limited trading volumes.
  • They're often subjected to illegal "pump-and-dump" schemes, whereby the stock is boosted by trader chatter before being sold by the perpetrators who lock in a profit.

Understanding Cats and Dogs

Cats and dogs are speculative shares, and often the subject of rumors of fraud, wrongdoing, or malfeasance among company managers or directors. They're often trade as penny stocks, which are shares of firms with small market capitalizations and limited trading volume that trade over-the-counter (OTC) rather than on a traditional exchange.

They're often are traded on so-called pink sheets. Unlike major exchanges, pink sheets have limited financial reporting requirements, which increases the risk of fraud. Still, legitimate companies trade on pink sheets, too, so investors need to thoroughly research companies.

Investors may struggle to find timely and reliable information cats and dogs, because, unlike larger firms, they don't receive the same scrutiny from regulators like the Securities and Exchange Commission (SEC).

The SEC, which oversees publicly traded companies, only obtains financial filings from companies with over $10 million in assets and at least 500 registered shareholders. Smaller companies can therefore avoid registering their financial statements with the SEC, making it easier for unscrupulous companies to mislead investors with false information.

In addition to "cats and dogs" referring to a type of stock, the financial world uses animals in a host of terms. The two most common are bulls and bears, signaling stocks that are poised for growth or decline, respectively, and those traders that invest in them as such. Other animals include rabbits, turtles, sheep, pigs, ostriches, chickens, stags, and wolves.

Cats and Dogs and Pump-and-Dumps

One dangerous fraud is the pump and dump scheme. In it, the perpetrators publish overly optimistic or misleading claims about a company's prospects using online chat groups, social media, email, news releases, and other forms of communication.

They aim to "pump" up enthusiasm for the security, bringing in buyers who bid up the stock price. Generally, these schemes are focused on thinly-traded OTC companies whose price may swing based on small amounts of buying.

When new investors come in and raise the stock price, the perpetrators of the scheme "dump" their shares and lock in a gain. The new investors, for their part, may face large or total losses.

Real-World Example

In 2005, a pump and dump scheme was carried out involving the Nevada-based shell company, VMT Scientific. The pumpers scheme bought the company, and masked their ownership by transferring their shares to offshore brokerage accounts. They promoted the company online and through news releases, issuing a series of false claims about a claimed "breakthrough" medical product allegedly capable of reducing the risk of amputations related to diabetes.

Investors rushed to buy shares in VMT, and the price spiked. The fraudsters dumped their shares for a gain of almost $1 million. In reality, the alleged product didn't exist, the company was under court custody, with neither revenue or operations.