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If you want to invest in stocks, but don’t have enough funds and you recently heard about pink sheet stocks or penny stocks. Here’s an article that explains everything you need to know about these stocks.
What are Pink Sheet Stock?
Pink sheet stocks are those stocks that are traded in Over-The-Counter marketplaces rather than stock exchanges like NASDAQ or BSE.
Back in the day, when quotations of share prices were published, they were written down in pink sheets, thus the name Pink Sheet Stocks. Today, the entire system is being carried out electronically but the name has still been intact.
As these stocks aren’t traded on the same platforms as publicly traded stocks, they may not have to follow the same guidelines followed by stocks in the well-known stock exchanges.
Pink sheet stocks represent those stocks that aren’t on the stock exchanges. Why? Because the stocks traded here are generally penny stocks.st
The companies here are small, young or maybe not interested to be in the stock exchanges. Most stocks here are just too small to enter the major stock exchanges, but few companies here stay pink because they don’t want to publish their financials to the public.
What are Penny Stocks?
Pink sheet stocks usually have smaller-company stocks also known as penny stocks. Penny stocks often bring along more risk than regular stocks. High volatility and high illiquidity are some reasons why penny stocks may not be the perfect way to make money.
The Securities and Exchange Commission (SEC) defines penny stocks as those stock shares that trade for under $5. They trade the same way as normal stocks do on the stock exchange.
The only difference between normal stocks and penny stocks is that the prices of these are far less and they have higher volatility thus offering more risk to an investor. Plus these companies are young and haven’t caught the eyes of the investor.
You can find penny stocks even on the stock exchange, so they’re not only restricted to pink sheet stock. Only the companies that are young or want to be out of the stock exchanges prefer this marketplace.
The advantage of Penny stocks is that they are cheap to invest and if the company grows, your returns will be extraordinary. If you find a credible company that still trades at low prices, you can buy those shares, this way you can multiply your money when the share price goes up.
Advantages of Pink Sheet Stocks
- Super Low Priced
Most of the pink sheet stocks are low prices, which makes it easy to buy. The prices are so low that anyone with few pennies can also invest in these stocks. You can also buy a lot of shares at an affordable price.
- Growth Opportunities
Emerging companies prefer pink sheets because of their low price points. They are first traded on this platform and once it grows in size, the company jumps up to trade in the stock exchanges like BSE/NASDAQ, etc.
If you invest in the Pink Sheet marketplace, you may be getting a first stand chance to make a lot of money as the company grows in size. Then you can sell your shares when they enter the stock exchanges.
Disadvantages of Pink Sheet Stocks
- Lack of Proper Information
Like I pointed out before, these companies don’t need to file their financial information to the public. Thus there is no easy way to check their growth, performance, debts, Profit to earnings ratio, etc. You may find general information from a few websites on the internet, but concrete information that directs you to buy or not buying the stocks of the company are not easily available.
- High Volatility
OTC (Over-the-counter) markets usually have higher volatility than normal stock exchanges. Higher fluctuations in price mean more risk involved for you. So before making a purchase, ensure that the company whose stock you are purchasing isn’t too volatile.
- Possibility of Fraud and Price Manipulation
As the financials of the company are not listed anywhere, they can easily resort to price manipulations just to keep the business running.
They have few regulations, which means there is more possibility for outdated or incorrect information showcased to the investors. You can’t say anything about these companies, that’s why they can lead to fraud and some companies can even get bankrupt overnight.
- You get fooled easily
If you’ve seen The Wolf on Wall Street, you know what I’m talking about. Brokers usually fool investors into buying pink sheet stocks in large quantities. If a stock is being overpromoted, chances are it’s being done because the commission for the broker is high.
All brokers keep their eye on the stock and promote it all day long, not caring if the company is good or bad for the investor. Thus you can get fooled easily into buying such shares.
How To Reduce Your Risk While Trading
These are highly risky investments, so we can’t eliminate risk but we can surely reduce risk. The first way to reduce risk is by learning how to study the financial documents of a company.
You won’t find a lot of information about these stocks but whatever you find, you need to learn to understand if that company is doing good or is it going to zero. The second way to reduce risk is ensuring you don’t follow the herd.
If a company has high commission rates for the broker, that’s the stock everyone is going to promote. So don’t listen to what they have to say. Doing that will probably lead you into tremendous losses.
The third way is by using a stock trading simulator that lets you use fake money and allows you to trade stocks in the OTC market.
How to Buy/Sell Pink Sheet Stocks
To buy/sell pink sheet stocks, you need a broker. He will help you buy and sell these stocks with ease, provided he finds a person looking to buy or sell your shares.
That means, it takes time to find a buyer whom you can sell your shares to and it takes time to find a seller who can sell his shares to you.
Not only that, but you will also take time to decide which stocks to invest in, because most of these companies are small and young, making their data hard to find.
The steps are simple and your broker will do all the work for you. What you need to do is study and analyse the stocks to ensure that you don’t make losses. Depending on your broker to suggest stocks in this market isn’t a good idea.
Four Cautions to know about Pink Sheet Stocks
- Most stocks here do not meet the minimum requirements of the stock exchanges and that’s why they are in OTC traded markets which are unregulated compared to stock exchanges which are regulated systematically.
- Some companies listed here may be illegal and illegitimate scam companies to raise funds and grab all the money and run. Beware of the companies you wish to invest in.
- The listed companies are not obliged to disclose their financials to the public. You need to dig up information to know more about the company’s financial records.
- Pink Sheet Stocks are penny stocks which mean most companies here are almost at the edge of insolvency (not always necessary).
Sage Tip For Trading In Pink Sheet Stocks
OTC traded stocks are similar but not exactly equal to stock exchanges. So even if you’re good at making money via stocks, this might be difficult for you. To solve that problem, try using a simulator.
A Simulator is just like the real market, the pieces of the stocks are the same too, just the cash you invest will be fake. Get some hands-on experience of the Pink Sheets Market before you try on the real game.
Once you feel comfortable with them, use a reputable online brokerage firm that lets you do OTC trading seamlessly (make sure they have a good customer care service at all times). These companies may also charge you a lot, so check all charges applicable before you get started.
Pink sheets offer companies a chance to raise funds to grow their business. Many investors can get in early and earn huge profits. On the other hand, these companies are small, so they can lead to loss anytime, so in the blink of an eye, your invested sum can go down to zero in a flash.
Does that mean, an investor like you and me should keep a distance from such stocks? Of course not. As said earlier, most companies are faced with high volatility but aim to grow their business.
This means a great return on your investments, investing about 2% of your investment portfolio in Pink Sheet Stocks may be a good option (provided you like to take on some risks).
When trading Pink Sheet Stocks, making losses instead of profits is casual, higher risks, lower returns is the norm in the pink city. Your motto has to be to do your best to reduce your risk and maximise your return.
Pink Sheet Stock offers exciting opportunities to increase your earning potential, especially in the short term. However, they do come with heavy risks. An investor needs to be very careful when he invests in a company.
Pink sheet stock may have a lousy repo – few of the companies are nothing but scams, few are almost insolvent, others never grow, but there are a few precious hidden gems, try finding it if you are willing to take risks and your rewards will be abundant.
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