Dee Asay Resource Advisor – Stock
I went and looked up the meaning at investopedia and this is what it says a stock that trades at a relatively low price and market capitalization usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB and pink sheets. The term itself is a misnomer because there is no generally accepted definition of a penny stock. Some consider it to be any stock that trades for pennies or those that trade for under $5, while others consider any stock trading off of the major market exchanges as a penny stock. However, confusion can occur as there are some very large companies, based on market capitalization, that trade below $5 per share, while there are many very small companies that trade for $5 or more.
The typical penny stock is a very small company with highly illiquid and speculative shares. The company will also generally be subject to limited listing requirements along with fewer filing and regulatory standards.
When a stock trades at $1.00 or below then it trades on the Pink Sheet.
What is a Pink Sheet?
I went to investopedia and this is what it says daily publication compiled by the National Quotation Bureau with bid and ask prices of over-the-counter (OTC) stocks, including the market makers who trade them. Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets also refers to OTC trading. The pink sheets got their name because they were actually printed on pink paper. You can tell whether a company trades on the pink sheets because the stock symbol will end in “.PK”.
What’s the problem with these stocks?
There are four major issues that we need to know when we trade these types of stock.
Lack of information available to the public
For these stock information is much more difficult to find on them. Companies that are listed on the Pink Sheet are not required to file with the SEC, and are not scrutinized or regulated as stock that is listed on the NYSE & the NASDAQ exchanges.
No Minimum Standards.
Stocks on the OTCBB and on the Pink Sheet do not have to fulfill the requirements to remain on the exchange. Once the stock can not maintain on the major exchanges then it moves to the smaller exchanges. When the stock is listed on the OTCBB they still have to file timely documents with the sec, but the stock listed on the Pink Sheet have no such requirement.
Lack of History
Many of these companies are either newly formed for approaching bankruptcy. They will also have poor track records or none at all.
Liquidity
When these stocks don’t have much liquidity, there are two problems that arise: first there is the possibility that the stock that you have purchased can not be sold. If there is a low level of liquidity, it may be hard to find someone to buyer for a particular stock. Second low liquidity provides opportunities for some traders to manipulate the stock price. This can be done in many different ways – the easiest is to buy large amounts of stock, hype it up then sell it after the other traders have found it attractive. This is also known as pump and dump.
Sure, some of these companies listed on the OTCBB and Pink Sheets might be good quality and some are working really hard to make their way up to the NASDAQ or the NYSE exchanges. However on the other side is that there is many good opportunities in stock that are not trading for pennies. You need to understand that this is a high risk area and is not suitable to all traders. So make sure that you do all your homework on these stocks and know what you are getting into.
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