Are Penny Shares Truly That Unpredictable?

People who are interested to invest in micro cap stocks or otherwise known as penny shares are curious as to where these stocks can be bought

. They are not listed together with blue chip stocks, but are usually found in the over the counter market. They are quoted on either the Pink Sheets or the OTC Bulletin Board.

The OTC Bulletin Board is the system of quotation where information such as real-time quotes, last sale prices, and volume information for OTC securities not listed on the national securities exchange of the Nasdaq are found. Although it is not under SEC regulation, the OTC Bulletin Board is overseen by the Financial Industry Regulatory Authority or FINRA.

On the other hand, Pink Sheets, which are named after the color of the paper on which they have been historically printed, are price listings of the quotes of the companies that trade in the OTC, or over the counter market. Brokers that buy and sell OTC securities use pink sheets to bid and ask prices for their investors. Pink Sheets LLC, formerly known as the National Quotation Bureau, is a private company that prints these listings available in hard copy and electronic format.

Penny shares are risky, and every potential investor should be aware of that from the onset. Many analysts claim that these shares are riskier than even blue chip stocks. For one, the information available to the public about these stocks is not really that extensive as those available for their blue chip counterparts. It is essential for successful investors, after all, to have as much information as possible, so that they can make the best decisions with their investment. OTC and Pink Sheets companies do not need to be filed with the SEC. The investor may have information about the company offering these shares in, but not really about the stocks themselves. Thus, the health of the company would seem to be the most reliable source of information for investors who want to venture into penny shares.

Moreover, there is also no standard minimum amount for companies to remain in the OTC bulletin board or pink sheets. There are some companies who used to trade in the major exchanges that would need additional funding and fresh money for a new venture, making them move to a smaller stock exchange like the OTCBB. The listed companies in the OTCBB or pink sheets may actually be ailing companies that need a financial boost, and are offering penny shares to get funds.

It is also said that a lot of companies offering micro cap stocks are newly established, if not in deep financial trouble, as earlier mentioned. Thus, their financial track records are either non-existent yet or very poor track records. Any sensible person would think that it is very risky to invest in something that is on the brink of collapse, or have yet to prove itself.

Lastly, penny shares don't t have a lot of liquidity, which makes it very difficult to sell the stock. Rare buyers of this kind of stock, knowing this, will wait until the price is further lowered before they buy, which will require its sellers to lower the price further. Thus, it is usual practice for holders of this kind of stocks to make them very attractive and sell all of them right away once they have lured an interested buyer.

by: Shawni Groezinger

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