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Home > Finance > Stock Market > Pink Sheets Stocks
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Pink Sheets Stocks
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Penny stocks are very related to pink sheets, and you should have an
understanding of both if you plan on investing in the stock market. It
is an electronic quotation system for many OverTheCounter (OTC)
securities. The name comes from the colour of the paper the quotes were
originally printed on. Most pink sheets are associated with penny
stocks nowadays.
1. Penny Stocks - What Are They?
The term penny stock simply refers to a stock that isn't worth very
much - under $5.00 per share. They can be traded normally, but you
should note that they are very high risk investments. Although they can
be traded on regular stock exchanges, companies that are listed in the
Pink Sheets usually do so because they cannot meet the requirements of
other exchanges like the NYSE and Nasdaq. Be careful when investing
your money.
2. Unregistered
The Pink Sheets is not a registered stock exchange. As such, it can
list companies that would otherwise be unable to raise capital through
stock offerings. Although it is not regulated by the Securities and
Exchange Commission (SEC) its trading system is only accessible by
brokers licensed by the National Association of Security Dealers (NASD)
and these brokers are required to follow NASD regulations. Companies
that issue stock listed in the Pink Sheets must follow Federal and
State security laws.
As an unregulated exchange, stocks listed in the Pink Sheets carry more
risk than stocks on the big exchanges like AMEX. The lack of financial
data means that companies may be facing bankruptcy and are issuing
stock in a last ditch effort to stay afloat. Not all companies are in
dire straights, however. Some may be in the process of becoming listed
on the regular exchanges and use the Pink Sheets as an intermediate
step to raise capital.
3. Get A Dealer
To get listed in the Pink Sheets a company needs a broker dealer to
quote the stock. The only requirement is that the broker is a member of
the National Association of Securities Dealers (NASD). Once listed, the
company remains in the Pink Sheets as long as the stock is quoted. It
can happen that a stock that no longer exists still is quoted in the
Pink Sheets a situation that highlights the need for researching any
company that lists here.
The main advantage of buying Pink Sheet securities is their low cost.
Investors who hope to get in on a new company right at the beginning
can pick up stock for literally pennies. In the event that the company
does well and grows the small initial investment will pay large
dividends.
4. High Risk
There is a very real risk, though, that the company will simply vanish,
leaving behind valueless stock issues. The investor interested in penny
stock in the Pink Sheets should be prepared to lose all. For this
reason, Pink Sheet investments should represent only a small portion of
an overall investment portfolio.
5. Hard To Sell
An even bigger issue is that the stocks have very low liquidity - this
means it will be difficult to resell your stocks after you purchase
them to make a profit. Unless, of course, your company hits it big in
which case you will most likely be a millionaire because you bought
stocks when they were extremely cheap and now the company is doing so
well the stocks may be worth ten times what they were previously.
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