If you are thinking about making an investment, then 'pink sheet' stocks are worth considering. These stocks are the least regulated type of stocks available. They are generally very cheap and have the potential to earn much more than safer, traditional stocks. Their inherent volatility, however, means you will need to be aware of some potential dangers.

'Pink Sheet' Stocks Defined

Pink sheet stocks are stocks that are listed by the OTC Markets Group, more informally known by the name "Pink Sheets.' It is not an official stock exchange, but merely a way of exchanging various securities between financial brokers. The companies listed here do not have to file reports, although some do provide information and are graded accordingly. The top grade, the OTCQX, has to undergo a qualitative review. Most of these stocks can be considered penny stocks, which can be defined as stocks with a value of less than $1, although sometimes they can be all stocks less than $5. Many people consider all penny stocks or micro cap stocks to be pink sheets, but these can also be traded on the “OTC Bulletin Board,” which has stricter regulations.

Benefits of 'Pink Sheet' Stocks

All companies have to start somewhere, and the next big thing could well be traded as a pink sheet stock. Prices are much lower so even smaller investors can afford to buy stocks in a specific company. There is the potential for much greater gains in these stocks than safer alternatives due to the inherent volatility of these markets. The transaction costs of dealing these stocks are also much lower than those listed on formal stock exchanges.

'Pink Sheet' Stocks Caveats

There are companies listed that are scams or essentially shell companies. Unscrupulous brokers or organizations may manipulate certain stocks in order to make a profit. Lack of information and transparency make it harder to do due diligence, although it is possible. The stocks can often be fairly illiquid as the trading volume is much lower than stocks listed on proper stock exchanges. It is unwise to put all your investment into a single stock, as it is better to spread the risk. Getting advice from knowledgeable and trustworthy sources is another way to help make less risky trades. Trading at the higher levels of the pink sheets, such as the OTCQX and the OTCQB, is also recommended.