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.
A share is a unit of ownership of a company. These shares are bought and sold by individuals and institutions. The shares of most major companies are traded on stock exchanges like NASDAQ and AMEX. However, there are some companies that are traded outside these stock exchanges. These are companies that are very small and do meet the minimum market capitalization requirement of the stock exchanges.
These shares of stock are traded on the Over The Counter Bulletin Board (OTCBB) and Pink Sheets. Pink Sheets, so called because they are printed on pink paper, started as a daily quote service.
Now, it is an electronic system that displays the latest quote prices, volume, and the last price sold of shares that are traded in the Pink Sheets OTC. The Pink Sheets headquarters is located in New York City. In 2007, $160 billion worth of securities was traded in the Pink Sheets.
What kinds of companies trade in Pink Sheets? The Securities and Exchange Commission (SEC) has laid down certain regulations that have to be followed by companies whose shares are traded on stock exchanges.
If the company does not meet those regulations, then they can trade on the OTCBB, and have to comply with very few regulations only. When it comes to Pink Sheets OTC, there are no regulations at all. Most of the shares traded here are of much less value and they can be identified with the extension .PK.
Pink Sheets companies do not have to disclose any kind of information about their company. Financial statements, profit margins, long-term goals, future outlook or budget need not be displayed to the public and no statements or forms have to be files with the SEC. Some companies take advantage of these pink sheets.
For example, Nestle S.A entered the United States Securities Market through pink sheets because no filings to SEC are mandatory. Except for foreign companies trading through American Depositary Receipts (ADRs), the companies trading in Pink Sheets are small, closely held companies that have a low trade volume.
Since August 2007, pink sheets companies have been categorized based on their levels of disclosure. However, it is important to note that these categories do not reflect the quality or risk of investment. The Pink Sheets Current Information lists companies that regularly disclose their earnings and other reports to the public. On the other hand, the Pink Sheets Limited Information lists companies that have financial difficulty and hence have only very limited information available for the public.
Finally, the Pink Sheets No Information category lists companies that have not filed any financial information during the last six months. These companies are considered suspicious and highly risky. Investors should steer away from the last category. As an investor, one must be very careful while investing in these companies because there is very little information available about these companies.
It is difficult to analyze whether the company will do well in the long run and if it is worth the investment. Another problem with these shares is that they are very manipulative and this paves way for frauds. Therefore, every investor should exercise extreme caution before investing in companies that trade in Pink Sheets.
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