Pink sheets is a corner of the securities market where you can find exciting opportunities if you have done your due diligence and research well. This small market is like the Wild West of the 19th century when there were no rules. There are almost no rules and no oversight on the these Sheets.
Companies traded on Pink Sheets do not have to file financial statements and do not even have to issue an annual report even. Most of these companies are happy being listed on the Pink Sheets and do no plan to move on to the Over the Counter Bulletin Board (OTCBB). Many even may don't have ongoing operations.
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You might be thinking that most of the companies that get traded on the Pink Sheets are just mom and pop shops posing as companies. This market is infact home to 20,000 stocks. For one reason or another, these companies have chosen to stay on the Pink Sheets.
The reason for this can be the company's desire for privacy. Getting listed on OTCBB may cause a loss of privacy for these companies as SEC requires to know exactly how each executive is being compensated and how the company owns assets.
Many smaller companies don't want to divulge all this information at this stage of their business cycle. If they are embarking on a new business venture, they might want to keep all of their information as secret. This forces many potential investors from staying away from Pink Sheets.
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To make matters worse, many market makers charge wide spreads on Pink Sheets. It is not uncommon for a penny stock on Pink Sheets to have a bid of $0.05 and an ask of something like $0.2-0.25. This happens when the market maker feels that the market for the stock is thin. The market maker does not want to buy a stock only to be stuck with it for a long time waiting for a new buyer to show interest. This wide spread is a way to discourage buyers away from this penny stock.
However, many pink sheets stocks have a spread of less than one cent so it pays for an investor to take the Pink Sheets seriously. Most of the stocks that trade on pink sheets have been beaten down so far in price that they trade below their book value. So savvy investors know that they can find a good penny stock on pink sheets. Do good due deligence and research before investing in pink sheets stocks!
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