Finding stocks that will return above average is difficult, and since markets are competent, information is easily shown in stock prices.
Therefore, investors are to find rough diamond.
This is what leads many investors into Pink Sheets stocks in search for a security that could give several returns.
Pink Sheets is simply a daily publication of stock quotes for bids for companies that cannot or do not want, for a particular reason or another, to appear on a major national exchange.
The name Pink Sheets appeared because historically the printed paper was pink.
The fact that Pink Sheets is a not an exchange service, but a quote, requires investors to exercise due meticulousness before trading OTC stocks.
Investors must adhere to several rules to ensure a sound investment, while buying or selling shares at the probable prices.
Who is involved in the pink sheets?
Approximately 15,000 shares are traded on Pink Sheets, which goes from small local companies to the very foreign large companies. Companies trade over-the-counter for many reasons such as:
- Perhaps the company has not complied with what is required for listing on the major stock exchanges.
- Some of these companies are excluded from key exchanges, often due to a deficit in financial information.
- Some companies fall off just after their shares have fallen below $ 1.
- Another reason is that some foreign companies do not heed to meeting the requirements for registration and listing of major US exchanges because they already have met the requirements of their country. These foreign companies would have to hire a team of legal and regulatory staff who are professionals in US security law, though filing requirements is expensive, especially considering that companies already got a comparable team to cope with the requirements that are listed in their country. Therefore, these companies decided to transfer to the “Pink Sheets”. Household names such as Volkswagen, Nestle and Nintendo are three examples of quality companies listed on the Pink Sheets.
The Efforts and Drawbacks of OTC Stocks
There are problems with investing in Pink Sheets stocks.
One of the advantages is that some of the high value names like the aforementioned pay dividends and will be a very reliable investment. Another advantage of Pink Sheets stock is their low prices.
Some stocks can be gotten for less than $1.
On the contrary, there are also disadvantages.
Pink Sheets are often thinly traded and also have no liquidity, which accounts for their volatility.
The distribution of bid-ask is wide, and those who invest should be careful and patient when placing an order to either buy or sell. In addition, irrespective of some standard companies, many of them are useless.
Since Pink Sheets is far from being an exchange, but a quote service, it is then not regulated and therefore can lead to fraud or other possibly dangerous investments.
For many of them, there is minimal transparency or essential information, while some of them are subject to different schemes.
Pink Sheets also prohibits short sales and margins, which may be negative or positive, all depending on the point of view of the investor.
Investors should take note of four warnings.
Firstly, many OTC stocks fails to meet the minimum of what is required for most exchanges and are not served by the SEC, thereby causing lack of reliable fundamental for analysis.
Secondly, Pink Sheets stocks are historically penny stocks which are mostly very much insolvent companies.
Thirdly, stocks are sometimes illegal shell companies created to defraud investors the issuance of press releases, while analysts advertise stocks and further give out worthless stocks.
Fourthly, Pink Sheets has only one requirement for a list of companies – a company must have a market maker citing its shares. Listing companies are not required to provide any financially related information.
One common over-the-counter investor fraudster is a scheme called “pump and dump” in which promoters purchase penny stocks, advertise and push stock prices for people, and then dump their own stocks, while those investors who came late are stuck with useless stocks that they overpay.
These promotions are often advertised on message boards, in spam emails and also on blogs.
The Pink Sheets tried to eliminate most of the shortcomings that connects with the service. One of the strategies is to launch a premium service called OTCQX.
The OTCQX has 3 varying levels of trading minimums of which there is the need for companies to fulfill what is required for inclusion in the main exchange, including the placement of annual or quarterly reports and the publication of all necessary information.
It is worth knowing that investors must follow a few simple rules when trading on the Pink Sheets, irrespective of the new service levels. such include carrying out proper research and having a good knowledge of the company you want to investing in.
Investors should be on the lookout for catalysts that will lead to potential investments when investing in any form of stock.
Example of such catalysts is any future news that will be of benefit to the company, such as the tendency of acquisition, a new service or a new product that makes for increase in profit and as well as a legal battle.
There is also the need for limits to be set by investors on the level of sell signals and other investments.
Doing away with market order and making use of limit order will help reduce the volatility concern.
Pink Sheets shares helps to make for a higher portfolio returns by a large amount in a very short time by offering exciting opportunities, but there are significant risks to these opportunities.
Investors must be extremely careful and meticulous with their market analysis and research of each investment. Setting strict investment rules and trading with limit orders will reduce potential risks.
Many useless companies have matured on the list of the Pink Sheets, some of which are just scammers.
Finding the underlying gene could be very difficult, but can be very helpful.