Why do companies find themselves on the Pink sheets?
To be listed as a pink sheet, a company does not need to meet any mandatory filing requirements. It is the ideal exchange for companies that feel the urge not to open up their financial details which is not so ideal for investors looking for detailed info on a companies financials.
Pink sheet stock is prone to fraud and price manipulation due to the lack of financial information required to list. Many companies could end up being shell companies without active business or assets.
Are There Any Risks Associated with Trading Pink Sheets?
The fact that companies listed on pink sheets don’t have to meet any regulatory standards this puts shareholders at risk. In the past, a lot of companies have exploited this loophole to their ‘advantages’. It is, therefore, best if an investor approaches pink sheets with extreme caution. They are usually very illiquid and often victims of pump and dump schemes.
You should also know that there are a lot of genuine companies listed on pink sheets whose intention is to raise capital. Pink sheets are a suitable option for micro-cap companies since it doesn’t require a lot of paperwork and extra fees. Compared to giant stock exchange such as NYSE where you have to pay a lot of money and undergo scrutiny from the Securities Exchange Commission.
Is Trading Pink Sheets A Good Idea?
Let’s face it, pink sheets appear to be quite tempting from the overview. But, when you consider the risk factors, pink sheets are not an ideal option for the average investor.
The price vulnerability and illiquidity make it worse for day traders looking scalp or get in and out of trades quickly with any type of size. It’s better to trade lower priced companies that are on a listed exchange like the NYSE or NASDAQ.
