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Penny Stocks - What Are They?

Penny stocks are very related to pink sheets, and you should have an understanding of both if you plan on investing in the stock market. It is an electronic quotation system for many OverTheCounter (OTC) securities. The name comes from the color of the paper the quotes were originally printed on. Most pink sheets are associated with penny stocks nowadays.



1. Penny Stocks - What Are They?

The term penny stock simply refers to a stock that isn't worth very much - under $5.00 per share. They can be traded normally, but you should note that they are very high risk investments. Although they can be traded on regular stock exchanges, companies that are listed in the Pink Sheets usually do so because they cannot meet the requirements of other exchanges like the NYSE and Nasdaq. Be careful when investing your money.

2. Unregistered

The Pink Sheets is not a registered stock exchange. As such, it can list companies that would otherwise be unable to raise capital through stock offerings. Although it is not regulated by the Securities and Exchange Commission (SEC) its trading system is only accessible by brokers licensed by the National Association of Security Dealers (NASD) and these brokers are required to follow NASD regulations. Companies that issue stock listed in the Pink Sheets must follow Federal and State security laws.

As an unregulated exchange, stocks listed in the Pink Sheets carry more risk than stocks on the big exchanges like AMEX. The lack of financial data means that companies may be facing bankruptcy and are issuing stock in a last ditch effort to stay afloat. Not all companies are in dire straights, however. Some may be in the process of becoming listed on the regular exchanges and use the Pink Sheets as an intermediate step to raise capital.

3. Get A Dealer

To get listed in the Pink Sheets a company needs a broker dealer to quote the stock. The only requirement is that the broker is a member of the National Association of Securities Dealers (NASD). Once listed, the company remains in the Pink Sheets as long as the stock is quoted. It can happen that a stock that no longer exists still is quoted in the Pink Sheets a situation that highlights the need for researching any company that lists here.

The main advantage of buying Pink Sheet securities is their low cost. Investors who hope to get in on a new company right at the beginning can pick up stock for literally pennies. In the event that the company does well and grows the small initial investment will pay large dividends.

4. High Risk

There is a very real risk, though, that the company will simply vanish, leaving behind valueless stock issues. The investor interested in penny stock in the Pink Sheets should be prepared to lose all. For this reason, Pink Sheet investments should represent only a small portion of an overall investment portfolio.

5. Hard To Sell

An even bigger issue is that the stocks have very low liquidity - this means it will be difficult to resell your stocks after you purchase them to make a profit. Unless, of course, your company hits it big in which case you will most likely be a millionaire because you bought stocks when they were extremely cheap and now the company is doing so well the stocks may be worth ten times what they were previously.


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13 comments:

  1. You summarize it pretty well here, thanks.

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  2. Very good article, a complex subject (at least for me) explained in a very simple way! Great job! It is scary to always work with some % of risk, the important job is keeping that % at the lowest number possible haha

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  3. Thanks for sharing this, I've found all the information on this site to be incredibly helpful. Now, I have a question... can one buy pink sheet (penny stocks) on Robinhood or other types of exchanges or are they solely available to select individuals?

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  4. This is very on point as I don't know about pink stock. Thanks for providing good advice.

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  5. What are the companies that use this. I mean stocks under 10 USD. It is very cheap and I guess companies will loose ob this. However, there might be a plan B to this.

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  6. Given their high risk factor, people should be extra cautious when it comes to penny stocks. A lot more dedication to research is required as opposed to the regular stocks.

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  7. Your explanation of what penny stocks are is clear, brief and to the point. Though I already knew about it your article helped clarify quite a few things to me. Thanks a lot.

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  8. There are so many terms to learn in the world of stock market. I would really love to invest on stocks someday. I really think that it is good for you to invest money on stocks.

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  9. I'm delighted to know what penny stock is and how it is related to stock trading. It's a simple term that carries a lot of weight though.

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  10. Now I am learning more and more about stocks. This is a good explanation of a penny stock. I want to learn more about stock investments since I want to invest on one.

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  11. Investing is the stock market is risky.You must be ready to lose..thanks a lot for your write up..I find it informative

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  12. Penny stock definition well put together and explained in clear terms. From the word penny I knew it will be about little money in the range of $5.This is a great explanation.

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