What is a Pink Sheet Stock?

November 18th, 2009 by Mike

There are many ways to attempt making money in the stock market. You can day trade, trend trade, swing trade, or be a plain old long term investor. Day trading will obviously be a riskier venture than investing, but when you’re dealing with stocks on the New York Stock Exchange (NYSE) or NASDAQ, at least you have a fighting chance. That isn’t always the case when you move down to the Pink Sheets.

The Pink Sheets were created in 1913. They got their name because from 1913 to 2000, their stocks were traded on pink pieces of paper. Since electronic trading became available in 2000, many investors have gotten burned by Pink Sheet stocks, and for many reasons.

Pink Sheet stocks often trade on very low volume, which leads to a lot of manipulation. Bigger players can almost move stock prices as they please. It’s dangerous for smaller investors to get involved. It’s also common for people to receive spam e-mails with information on penny stocks trading on the Pink Sheets. It is wise to remove these e-mails without opening them.

One way to know that you’re getting involved in dangerous territory is that stocks trading on the Pink Sheets don’t have any regulation requirements. They don’t have to follow the same rules as stocks/companies trading on the New York Stock Exchange and NASDAQ. They don’t have to file earnings reports or financial statements with the Security and Exchange Commission (SEC). This is a red flag.

Luckily for you, it is difficult to buy shares of a stock trading on the Pink Sheets these days. Those involved will only net new investors in if they want them in. This is another factor to keep in mind if you’re ever looking to trade on the Pink Sheets.

All this said, believe it or not, there is still an opportunity to make money on the Pink Sheets. There are penny stocks on the New York Stock Exchange and NASDAQ, but a penny stock often means trading below $5. Apple once traded below $5, as did Ford and GE. You’re not going to find companies of that size on the Pink Sheets; however, you will find stocks trading under $1. These types of stocks can have enormous fluctuations, which can lead to mammoth gains. The key is to do as much homework as possible and not to get involved unless you feel very confident about your purchase.