Pink Sheets - Are They Worth The Risk?

If you have an interest in penny stocks then you no doubt have heard of Pink Sheets. Pink Sheets is an electronic quotation system for a number of over the counter (OTC) securities. The name is derived from the color of the paper on which the quotes were originally printed. The Pink Sheets of today are published on the internet and the bulk of those listings are the so-called penny stocks.

Penny stocks are securities that carry a value of less than $5. While it is possible that penny stocks can be traded on the regular stock exchanges, the companies that typically list in the Pink Sheets are the ones that are unable to meet the requirements of larger exchanges such as the Nasdaq and NYSE. The Pink Sheets do not have any listing requirements, allowing any company, even a company with no financial history, to be listed.

It is important to note that the Pink Sheets is not a registered stock exchange. Because of this, it has the ability to list companies that would not be able to raise capital through stock offerings. However, even though the Pink Sheets is not regulated by the Securities and Exchange Commission (SEC) only brokers that are licensed by the National Association of Security Dealers (NASD) are able to access it. These brokers are bound by the NASD regulations and companies issuing stock that is listed in the Pink Sheets are bound by Federal and State security laws.

Due to the nature of the Pink Sheets, being an unregulated exchange, there is generally more of a risk to investors than stocks that are on the larger exchanges such as AMEX. Because there is no requirement for financial data, it is easy for a company facing bankruptcy to issue stock in a desperate attempt to remain afloat. This could lead investors to place their trust and invest in a very unstable company. However, not all companies that list on the Pink Sheets are in dire straits. Some companies use the Pink Sheets as a stepping stone to becoming listed on the regular exchanges and the Pink Sheets serve as an opportunity to raise capital.

A company wishing to become listed in the Pink Sheets must obtain a broker dealer to quote the stock. This broker must be a member of the National Association of Securities Dealers, but there are no other requirements. Once the company is listed, it remains in the Pink Sheets for as long as the stock is quoted. This creates the possibility for stock that no longer exists to still be quoted in the Pink Sheets. Because of this, it is integral to research any company in which you wish to invest, prior to putting down the first dime.

The low cost of Pink Sheet securities is the primary advantage that they offer. Investors who wish to get in on a new company at the onset can pick up stock for literally pennies. If a company does well and grows that initial investment can grow from pennies to much large dividends.

Pink Sheets do pose more of a risk for investors, though. A company may simply vanish, leaving worthless stock issues in its wake. If you invest in penny stocks, you should be prepared to lose it all. Because of this risk, Pink Sheet investments should only represent a small percentage of your investment portfolio.

A lack of liquidity is another risk to investors of Pink Sheet listings. The volume is usually very low and it can be very difficult to find a buyer for the stock. The seller may have to settle for a price that is much lower than initially anticipated just to be able to unload his or her shares.

Investing can be confusing, but we can help with more information on our free list of penny stocks, where to buy penny stocks online and penny stocks listing nasdaq.