The Risks of Pink Sheet Penny Stocks
Pink sheet penny stocks are stocks that do not live up to the requirements for being listed on major stock exchanges, and are therefore listed on the pink sheets instead. Due to the high risk, not all stock brokers will deal with pink sheets penny stocks so if you are set on investing in them, you might have to find a specialist broker or a discount brokerage that allows over-the-counter (OTC) trades.
What Makes Pink Sheet Stocks Risky?
Companies listed on the pink sheets are not required to report the same amount of information as companies listed on the major stock exchanges. They are not properly regulated and information provided is not scrutinized by the SEC. This lack of verified information is crucial to investors. When information is available there is a danger of it being biased since penny stock companies, especially dodgy ones, sometimes pay people to recommend their stocks.
Since the penny stock companies are often just starting up, investors can’t gauge their history. Often, there simple is no history! This lack of a track record again increases risk. It is a lot easier to determine if a company can be trusted when it has a long history.
Penny shares generally suffer from low liquidity, meaning the stocks aren’t traded often which allows one buyer to push up the prices by buying large amounts of stock. This lack of liquidity increases risk since it can be difficult to sell the stocks again. You are also in danger of becoming the victim of a “pump and dump” scam; an investor buying a large number of stocks, making the value increase, then selling for a healthy profit.
When learning all the risks of pink sheet penny stocks you might think that you should just stay away from them entirely. This is not necessarily the case; you just need to realize that you are running a risk so you will need to take necessary precautions to help mitigate that risk, such as diversification.
The fact is, there are indeed highly profitable penny stocks to buy and this type of investing can be highly lucrative, but they are also inherently volatile and the lack of regulation of pink sheets stocks make them a prime target for various charlatans and fraudsters. So keep your head in the game and carefully consider all aspects of a stock before you buy.
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