The Stock Market – What Are the Pink Sheets?
The Stock Market – What Are the Pink Sheets?
By Suzanne Bender
Penny stocks and Pink sheets go hand in hand in the world of stock investing. In stock market trading, the pink sheets refer to an electronic quotation system for OverTheCounter (OTC) securities. These securities are not supervised by the Securities and Exchange Commission (SEC). Because the quotes were originally printed in pink paper, the term pink sheets stuck.
A Penny stock is a stock that has a low price per share, usually less than five dollars. They are considered high risk investments; usually small or new companies with little capital, and small number of shareholders. They do not yet meet the requirements in order to be traded in the larger Exchanges. Investors should be careful with these.
Pink sheets are not regulated by the SEC and lists companies that are unable to raise capital through stock offerings. Since they are not registered within the stock exchange, they are only accessible to investors by brokers. These brokers must be licensed and follow the National Association of Security Dealers rules. Pink sheet companies must follow federal and state security laws, but they are not required to file reports with the SEC.
The lack of reporting results in limited financial data available to the investor. This makes companies on the pink sheets a high risk investment. Some of these companies may be facing bankruptcy, and trying to use the system to stay afloat. However, not all the listed companies are in bad shape. Some may be new companies looking to raise enough capital to enter the larger exchanges.
How do companies get into the Pink sheets? They need a licensed broker who is a member of the National Association of Securities Dealers (NASD) to quote the stock. Once listed, the company remains there. However, due to the lack of reporting requirements, a stock that no longer exists may still appear in the sheet, long after the company has become defunct.
One advantage to these Pink sheet stocks is the low price. A newer company’s stock can start out literally costing pennies. If the company does well and the stock performs, the investors’ initial investment will end up paying large dividends.
On the downside, there is also the risk that these stocks will not perform, and become worthless. Online trading has made it easy for investors to play with these stocks, but they should only amount to a small percentage of an overall portfolio. Since they are more difficult to resell, penny stocks have a low liquidity value. You could luck out though! There is always the chance that a pink sheet company will perform well, and the investment will be a big payday for you.
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Posted by investorview
on Feb 23 2012. Filed under Market News.
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