Penny Stocks

The pink sheets are an over the counter market, which means that there is no central trading location as with a stock exchange. It connects stock traders electronically. Quotes are also listed digitally. Without a central stock exchange, there are fewer criteria that a business needs to meet in order to be listed. As a result, they come with their own set risks and advantages.

Difference Between Pink Sheets and Other Stocks

There are almost no requirements for pink sheets penny stocks to be listed. The company needs to file Form 211 with the OTC compliance unit, and offer up to date financial information. The more open the information, the easier it is for a broker or dealer to to quote a price, but the companies are not obligated to show their books. For this reason, the information is not nearly as transparent as on the stock exchange.

Companies listed on pink sheets are generally small, and not heavily traded. Often, they don't file yearly reports with the Securities & Exchange Commission (SEC).

The OTCBB is another over the counter exchange, but it is owned by NASDAQ, rather than the privately held pink sheets. The standards for pink sheets are also more lenient.

Advantages of Pink Sheets Penny Stocks

Shares are very inexpensive. Many of them are "penny stocks," meaning that shares cost less than a dollar (sometimes $5 depending on who you ask). For this reason, even penny sized changes in the share value can be very beneficial for investors.

In some cases, if a major company is delisted from the stock exchanges because it fails to meet specific requirements, it may be advantageous to buy pink sheet stocks in the company in the hopes that it will make a comeback.

Pink sheets also allows you to buy stock in companies that show a great deal of promise but are not yet nationally known. If the company keeps growing, it could prove to be a very smart investment. Some might even make the jump to the major stock exchanges.

Pink sheet stocks are also rated according to a tiered system which helps traders avoid investing in companies which might be higher risk.

The Downside

The most important disadvantage of pink sheets is the fact that the transparency of the system is much lower. Companies listed on the market are not required to provide any information to investors whatsoever. This can make it difficult to identify exactly what you are investing in and what is happening with it over time.

The companies are also thinly traded. This means that it is hard to liquidate your investment and turn it into cash. If your shares gain a great deal of value, they will lose some of this value if you try to sell them all at once. The bidding and asking prices have a large spread, which makes it difficult to negotiate a good price on the trade.

Finding information about a company whose stock is being traded through pink sheets can be very difficult, because important analysts rarely cover them, if ever.

Conclusion

Ultimately, the most important thing to remember about pink sheets is that not all companies on the market are interested in providing upfront information about what is happening with their company. Their most enticing benefits are the low cost of the shares and the possibility that the company could explode in popularity. Buying pink sheet stocks can be a smart decision if you are aware of the risks involved, and adjust your investment decisions accordingly. Pink sheets have also made a great deal of changes since they were first introduced, adding a tiered system that improves accountability.