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What are pink sheets and penny stocks?

What are pink sheets and penny stocks?

Pinksheets Pennystocks

Investors are always looking for the next Apple, Facebook, or for that matter, any company that is now doing exceptionally well. Still, it can be challenging to find that one star that will give you the best returns. Diving into the market of penny stocks does come with risk. Investors need to assess the advantages, disadvantages and threats when it comes to trading penny stocks and pink sheets.

Penny stocks refer to a small company’s stock currently trading for less than $5 per share. While many of these penny stocks trade on stock exchanges like the NYSE, most penny stocks trade over-the-counter (OTC), which refers to a direct supply of stock from the company to shareholders without any intermediaries. Companies that prefer to sell stocks over the counter may use pink sheets. Pink sheets are listings for equities in companies that do not meet the requirements for their exchange. Like penny stocks, pink sheets are often traded for less than $5 and are regarded as highly speculative since fewer past results are available. In addition, pink sheet stocks have high risk due to a lack of regulations and insufficient liquidity.

The advantages of trading pink sheets and penny stocks

Penny stocks are highly volatile and mainly driven by growth, making them high-risk investments. However, as risk increases, the potential rewards are bigger and penny stocks and pink sheets have the potential to deliver outstanding results from your investment. In addition, they offer investment in high growth over a short period, hence the popularity among investors looking for development.

The disadvantages of trading pink sheets and penny stocks

Unfortunately, this highly lucrative investment comes with a correlated risk, as there are many disadvantages to trading penny stocks. Firstly, companies are relatively young and do not publish much data about past performance. In addition, analysts’ forecasts are either non-existent or have limited reliability.

Secondly, low prices in the market lead to low capitalization, and inferior liquidity makes it somewhat complicated for shareholders to withdraw their cash funds. Liquidity is essential when investing in penny stocks as there are many reasons a shareholder might wish to withdraw their funds from the company. Companies with lower volumes can suffer from a significant decrease in liquidity and that’s something an investor should consider.

Moreover, penny stocks and pink sheets can also be subject to scams, e.g., a “pump and dump” scheme. This scheme is a form of fraud where the participants will inflate the price of shares in order to dump them once the price is high enough. In addition, some people claim to have inside information and might request lump-sum payments for more insights on penny stocks, which could potentially harm investors, as advice is often false.

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