Advantages And Disadvantages Of Making Stock Investments In the Pink Sheets

With the recent fall of stock prices in major stock exchanges such as the New York Stock Exchange and NASDAQ, some companies whose stocks have been trading in these exchanges may be moved, or have been moved to the Over the Counter Bulletin Board (OTCBB), and/or the Pink Sheets.

The stock exchange minimum trading standards which Pink Sheets or OTCBB stocks often do not meet can be one or more of the following: corporate disclosures, minimum number of shareholders, SEC filings, minimum number of shares, and share price values.

There are advantages and disadvantages to making stocks investments in companies listed either in the OTCBB and or in the Pink Sheets. The primary advantage is that share prices are generally lower. Pink Sheets stocks are cheap, hence the name penny stocks.

The secondary advantage of making stocks investments in companies listed in the Pink Sheets is that there are many companies that start offering their stocks here as a way of moving up to the larger stock exchanges. Many of these companies are startups with a vast potential for enormous growth. The buyer may be able to make stocks investments with a high growth company that moves to a larger stock exchange, or that could be acquired by another company at a premium price.

The third advantage of making stocks investments in penny stocks is that these stocks have the potential to appreciate very quickly. It is not uncommon for stocks traded in the Pink Sheets to rise in value in a matter of days, sometimes even in a matter of hours. A 10-cent stock share can rise to 60 cents per share in such time. There have been instances where stock prices have gone up by 500%, and some even to more than 1000% of their initial purchase value.

Before you go off to make stocks investment in companies listed on the Pink Sheets, it would be wise for you to study the disadvantages of doing so. The advantages mentioned earlier should be weighed against the risks involved.

The first disadvantage of Pink Sheets stocks is that the companies that trade there are not required to do any financial disclosures in order to be quoted. The OTCBB has minimal reporting requirements (such as on-time filing of financial data with the Securities and Exchange Commission).

With little financial disclosures, it is quite hard for the person making the stocks investments to verify if the company whose stock is quoted in the Pink Sheets is really engaged in the business it supposed to do, or is simply a stock issuing operation.

The second disadvantage of Pink Sheets stocks is that they are more prone to stock fraud and manipulation than stocks traded in the larger stock exchanges. The relatively cheap prices of penny stocks and minimal or non-existent company disclosures make it easy for unscrupulous stock manipulators to do pump and dump schemes and other stock trading fraud.

The third disadvantage is the opposite of the third advantage mentioned earlier. While such stocks investments can appreciate very quickly, these same stocks can lose their value fairly quickly. Legitimate market forces and the law of supply and demand would dictate rapid price changes. Sometimes though, these rapid rise and falls are due to stock fraud and stock manipulation.

Last but not least, with the vast number of companies quoted in these listings many stocks are thinly traded. There are stocks that could go for days or weeks without any trade or activity.

Knowing the advantages and disadvantages of dealing with companies quoted in the OTCBB and Pink Sheets could help you make better stocks investments.

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