Pink Sheets Stocks
If you are interested in penny stocks
you are sure to hear about the Pink Sheets. It is an electronic quotation
system for many Over-The-Counter (OTC) securities. The name comes from
the colour of the paper the quotes were originally printed on. Today
the Pink Sheets publishes quotations on the Internet, and most of its
listings are so-called penny stocks.
Penny stocks are securities that are less than $5
in value. 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. The
Pink Sheets has no listing requirements – even companies with
no financial history can be listed.
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 which 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.
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.
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.
Another risk to the investor is the lack of liquidity
of Pink Sheet listings. Volume is generally quite low and finding a
buyer for stock may be difficult. The seller may have to settle for
a much lower price than anticipated in order to unload his shares.
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