How to Buy Pink Sheet Stocks
Pink sheet stocks are shares that do not trade on a stock exchange. Like shares that are traded on a stock exchange, the shares traded in the pink sheets represent equity in the business. However, by not being on a stock exchange, pink sheet stocks are not subject to the oversight of other stocks and therefore are more susceptible to scams.
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Considering Pink Sheet Stocks
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Avoid pump and dump scams. Pink sheet stocks that are mentioned in unsolicited emails or faxes often are being manipulated in what is commonly called a pump and dump scheme. The schemer will buy shares in a stock at a relatively low price, then market the stock as a wonderful opportunity in emails, faxes and other junk mail. The price of the stock increases as people buy the stock based on the junk mail, then the scammer sells the stock at the higher price, which causes the price to be depressed. This causes the unsuspecting investor to lose money by paying too much for a penny stock only to see the price drop after their investment.
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Consider liquidity concerns. The pink sheets are full of stocks for very small companies and those in which there are very few shares outstanding. Consequently, the price of the stock may increase materially even with small increases in demand for the stock. Likewise, it may be difficult to sell the stock because it may be difficult to identify a buyer. This can cause the sale price to be much lower than anticipated.
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Dig into the operations of the business. Because pink sheet stocks are not as closely regulated as stocks that are listed, it is important to dig into the details of the company. This should include researching the financials of the company and a clear understanding of the company's business model.
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