Pink Sheets and Profits

If Wall Street represents modern capitalism, then the Pink Sheets are representative of the Wild West. To many, the Pink Sheets hardly exist, and the OTC market is just another of the many small and privately owned stock exchanges that have managed to hold on until the twentieth century.

What are the Pink Sheets?

The Pink Sheets is an over the counter (OTC) market designed to allow small companies to trade freely without restriction or hardly any requirements at all. In fact, the Pink Sheets are not at all a stock market, and they are instead made up of many independent NASD brokers who serve as market makers for companies listed on the Pink Sheets.

The Pink Sheets were first founded in 1913, when stocks were traded by a pink paper slip, identifying the ticker symbol and current market price. Unlike the New York Stock Exchange, the Pink Sheets is merely a quotation service, offering only recent price and trade data, but not the ability to actually buy and sell within a sanctioned market.

To list on the Pink Sheets, companies need not fulfill any requirements; instead, they need to only have one approved market maker. Unlike the NYSE or NASDAQ, there are no minimum share sizes, no requirements for financial disclosure, nor is it necessary for companies to actually be in operation.

A number of companies that have fallen on hard times, or have flat out fallen into bankruptcy, eventually slide to the Pink Sheets, where their ticker symbols lay to rest among other once large companies.

Risk and Reward

The SEC and many other financial reporting agencies consider the Pink Sheets to be the highest risk of any financial product. Since most names are illiquid, bankrupt, or fail to report earnings or other critical data, making money with Pink Sheets is not even an afterthought for many investors, but the opportunities for profit do still exist. Because so many are quick to dismiss the Pink Sheets as stocks that aren't worth owning, there are excellent opportunities in companies that list on the Pink Sheets for convenience or cost, not necessarily because of their own financial difficulty.

In fact, the Pink Sheets houses more American Depositary Receipts of foreign companies than any other stock exchange due to its low requirements and inexpensive listing fees. The New York Stock Exchange, by contrast, requires as much as $125,000 to list a stock on its exchange, an amount that is not easily covered by small companies wishing to trade on US borders, or by banks which seek to earn a profit by bringing foreign stocks to US investors.

At a very minimum, investors should seek to find reporting information for all Pink Sheets in which they want to invest and seek stocks which have volume sufficient enough for easy entry and exit. Since a number of firms are thinly-traded, small orders of stock have tendency to create large waves in share prices, or they may require that investors buy in higher and sell lower than market price.

Avoid the Trap

While the Pink Sheets collectively have one of the worst reputations, not all Pink Sheet listed companies are bad apples. With proper due diligence and minimum reporting, playing Pink Sheets offers opportunities for large profits and risk profiles not much different from other stocks on other stock exchanges. Consider the high growth rates and low price to earnings multiples of the best Pink Sheets stocks to be your reward for the extra time it takes to sort through the losers.

http://www.mysmp.com/stocks/pink-sheets-and-profits.html