The Securities and Exchange Commission (SEC) lays down certain rules and regulations that must be followed by companies whose shares are traded on formal stock exchanges. The companies that do not meet these rules and regulations are traded outside these stock exchanges in the Over The Counter Bulletin Board (OTCBB) and Pink Sheets. Most of these shares are called penny stocks.



There is no universal definition for penny stocks. According to the SEC, if the price of a stock is less than $5, it is called a penny stock.

Another definition categorizes penny stocks as the shares of a company whose market capitalization is less than $500 million. Market capitalization is calculated by multiplying the value of each share with the number of outstanding shares. Stocks that trade outside the formal stock exchanges like NASDAQ and AMEX are also classified as penny stocks.

The primary reason for not having a universal definition is that these stocks may move in and out of formal stock exchanges, depending on their share value and market capitalization.

If the share value is high, then it will automatically result in higher market capitalization and so these stocks will be traded on stock exchanges. On the other hand, when the company goes through tough times and when its value falls, this stock will be forced out of the stock exchanges and they will trade on the OTCBB or Pink Sheets. The recent financial turmoil in financial markets has reduced the share value of many companies.

In fact, many companies' shares trade for less than $1. These companies have been forced out of the formal stock exchanges like NASDAQ. They now trade over the counter on OTCBB and on Pink Sheets.

The main difference between penny stocks that trade on OTCBB and Pink Sheets is the number of regulations that they have to follow, and their level of disclosure. Penny stocks that trade on the OTCBB have to follow certain regulations laid down by the SEC. They have to disclose their financial statements to the public.

On the other hand, companies that trade on the Pink Sheets do not have to comply with any regulations laid down by the SEC. Also, they are not obligated to disclose their financial statements to the public. The stocks that are traded on the Pink Sheets have a .PK extension.

For example, ABC company's shares that trade on Pink Sheets will have the name ABC.PK. This helps brokers and investors to identify the shares that trade on the Pink Sheets.

One must be very careful while investing in penny stocks because of the lack of information available about their financial status and workings.

This is especially true in the case of shares that trade on the Pink Sheets. This is the reason why they have an extension. This extension is a way to inform investors that they should do extra research before investing in these penny stocks shares.