Trading Pink Sheet Stocks Is No Game for Novices

Many people are intrigued with the huge profits some traders make in pink sheet stocks. These stocks generally trade at low prices. Some may even trade for under $1 a share. However, a small increase in the price of these stocks can translate to a large gain. For example, a stock trading for 50 cents a share would need to increase to only 75 cents a share for a 50 percent gain. Yet the investor, focusing on the potential profits, can overlook the risks associated with trading pink sheet stocks. As in most cases of investment, a high risk can equal high rewards, but it is important for potential investors to understand all of the risks before investing in pink sheet stocks.

What Are Pink Sheet Stocks?

Most stocks are bought and sold on exchanges. Some exchanges have a physical location where these transactions take place. However, some exchanges do not have a physical location. Transactions occur through a computerized network. Companies must meet certain standards to be listed on an exchange. For example, a company must have a minimum amount of earnings. Its stock must trade for a minimum price. The company must make certain public filings. Audited financial statements are usually required. Additionally, information on the ownership of the company must be disclosed. However, pink sheet stocks are not traded on an exchange. The pink quote comes through an electronic quotation system. Since these stocks are not traded on an exchange, they are not subject to the listing requirements. Pink sheet stocks are usually issued by small companies that cannot meet the stringent requirements for stocks found on the exchange. These are the kinds of stocks that typically trade at low prices. They are also often referred to by another name, penny stocks.

Risks Associated with Pink Sheet Stocks

A key to determining the value of a company is to carefully examine its finances. Pink sheet stocks are not required to have verifiable financial information to be traded. Therefore, the company may be unstable or even bankrupt. Owners who lack integrity can pose as the soundest of companies. There is no guarantee that you are not dealing with unscrupulous owners. The overall lack of information increases the possibility of being victimized by a scam or fraud. Although most of the companies traded on the pink sheets are legitimate, some are not.

Pitfalls for Novice Investors

Investing in pink sheet stocks places an increased burden of research on a potential investor. The investor must uncover sufficient financial information to justify the investment. While there are many sources of information, the average investor may not be aware of these sources. Even if the relevant information can be located, many novices are not skilled in recognizing reliable information. One must have the expertise to dissect complicated financial statements. An important part of the analysis is assessing the integrity and competence of management. And obtaining this information regarding companies in question can be very difficult. Some of this information may not be found in public records. These factors suggest that these stocks may not be appropriate for novice investors.

blog comments powered by Disqus
Scottrade