Use Caution Trading Penny Stocks

Use Caution Trading Penny Stocks

Wednesday, July 3rd, 2013 - Locating stocks that will return a huge return can be difficult as markets are efficient, information is available on demand and reflected in stock prices. Traders, therefore, need to locate the diamond in the rough patch. For this reason, many investors turn to pink sheet stocks to find a security that can return multiples of it’s basis.

Pink sheets is a daily quoting system of bid-ask stock quotations for companies unable or unwilling, for one reason or another, to be listed on any major national exchange. The pink sheets name came about historically, the paper quotes were printed on were pink. The fact that pink sheets is a quotation service and not an exchange requires investors to do a lot more research and take a lot of safety precautions before purchasing (OTC) stocks. Investors need to follow several rules to ensure the investments are rock solid and the purchase or sale of stock are at the prices you were expecting.

Who Participates in Pink Sheets?

Over 15,000 stocks trade on the Pink Sheets market, from small companies to large foreign companies. Companies may trade on the OTC for several reasons. One reason could be that a company fails to meet a listing requirement for the major stock exchanges. However, some of these companies are often de-listed from the major exchanges due to lack of financial information, or some fall off after their stock dropped below $1. Another reason could be that some foreign companies do not wish to meet the filing and listing requirements of the U.S. exchanges when they have already met the requirements in their home country. These foreign companies would be required to hire a team of legal personnel whom would need to be experts in U.S. security law and filing requirements. This is extremely expensive, especially considering that the companies already have a similar team to handle any requirements to list in their home country. With that being said, these companies decide to list on the Pink Sheets. Household names such as Nestle, Nintendo and Volkswagen are three extremely quality companies that were once listed on the Pink Sheets.

Upsides and Downsides to Penny Stocks

There are many upsides to investing in Pink Sheet stocks. One advantage would be that there are quality names like the ones mentioned above that pay dividends and would be extremely sound investments. Another advantage could be that Pink Sheets stocks lies in their cheap prices. Many shares can be picked up for less than $1.

However, there are a few downsides. Penny Stocks lack liquidity and often are very thinly traded, making them extremely volatile. The bid-ask spread is also very wide, and investors need to be extremely patient and cautious when submitting a buy or sell order. In addition, despite many of the quality companies, a lot of them are worthless. Pink Sheets is not an exchange, but a quotation service, it is not regulated like the other major exchanges. You need to make sure that you properly research any company may decide to invest in. Make sure that you have a company that you trust to give you advice.

Buyer Beware!

Traders should be aware of the four warning signs. Most OTC stocks do not meet the minimum requirements that the major exchanges require. Credible and reliable data will be unavailable unless you have a source that you can trust and you have thoroughly done your research. Pink Sheets stocks are penny stocks and are often startups. Pink Sheets often do not provide any information at all.

Bottom Line

Pink Sheets stocks offering exiting opportunities to increase your portfolio by large returns in a very short time. These opportunities come with risk and you need to do your homework before investing any more. Newsletters such as, PennyStockHot.info Newsletter offers great advice to beginner investors and also sends its members free penny stock picks.