What are Pink Sheets Stocks
You will probably go to a recognised Stock Exchange such as the FTSE, NYSE or the NASDAQ in order to trade in your favourite stocks. However, your favourite company has to be listed in these exchanges. Listing requires that the company follow very strict rules and regulations in order to keep their status.
Some stocks may not qualify to be listed in these exchanges. Their stocks will usually be dealt with between individuals connected by telephone or computer networks. This is called trading over the counter. Most over the counter stocks will trade on the Pink Sheets or the Over the Counter Bulletin Board.
Why Pink Sheets?
The name Pink Sheets probably came from the pieces of paper that floor traders used to exchange while trading such stocks. The papers happened to be pink in colour.
Companies trading on the Pink Sheets are not required to meet minimum requirements or file with the securities board. They are typically in the Pink Sheets because they are too small for the major exchanges or they do not wish the public to scrutinise their finances.
Disadvantages of Pink Sheets
Pink Sheets are not on a listed exchange. You will only find quotations for them. As such, with very little oversight, you are likely to face the following disadvantages trading them:
- Huge spreads – Making it difficult to enter or exit a trade,
- Little information – Few analysts cover them, and
- They trade at very low volumes
Advantages of Pink Sheets
One of the biggest attractions to Pink Sheets is their low price. You are likely to find good companies below $1. You therefore do not need huge funds to trade in them. The other side is that you may become too greedy and trade too much.
Since listing in the Pink Sheets is one of the first steps towards being listed in the major exchanges, there is a very high likely hood of good price appreciation. You can easily grab a sub one-dollar stock that could be worth hundreds if it is managed properly.
How to Trade Pink Sheets
Due to little regulation in Pink Sheets, the risks involved can be very high. As such it is extremely important that you do due diligence. It is very possible to stumble on to an illegitimate company and lose your investment.
One of the best tips in trading Pink Sheets is to be sceptical and think hard before you buy the stocks. If you are greedy, you are likely to use too much of your funds chasing bad investments. Do not fall prey to fake investment advice.
Trading in stocks listed in the Pink Sheets can be very risky. However, the rewards can be huge if you take time and make informed decisions.