Its extremely important that investors know how to distinguish between terms like pink sheet and penny stock, bulletin board and micro cap. The differences can mean making a winning or losing trade.
One way to educate yourself about the true definition of these terms is to use word association. Think of an aspect of the term and come up with a commonality with the actual name.
Penny Stocks ” As a general rule of thumb, any stock priced under $5.00 is considered a penny stock, though many traders dont consider a stock to be a penny stock unless its priced under $1.00. Either is acceptable, though one definition clearly expands the number of stocks that could qualify as penny stocks.
If you want to short or buy a penny stock on margin, make sure you know whom youre doing business with. Some brokerages will not allow shorting of any stock under $5; others dont place a limit. So, choose wisely.
Many low-priced exchange-listed stocks are cheap due to a temporary situation that once cleared up, will send the stock higher. The company size or its exchange do not determine its status as a penny stock”which can be a pink sheet or bulletin board stock (see below).
Pink Sheet ” A pink sheet stock is an equity that trades on the over-the-counter quotation system maintained by Pink OTC Markets Inc. Though this is generally considered to be the least desirable ” and most dangerous ” market to delve into, the stigma isnt always deserved.
Some foreign stocks choose to list their equities in the U.S. market, but for technical or logistic reasons cant list their stock with one of the exchanges or the bulletin board system. That doesnt make the investment any less credible though. The size of the company (or market cap) is irrelevant.
If viewing weekly financial statements of a company is a deal breaker for you, then stay away from pink sheet stocks. The majority of them dont disclose audited accounting statements because they arent required to do so.
Bulletin Board ” Though commonly (and somewhat errantly) referred to as trading on the OTC market, or as an OTCBB stock, a bulletin board equity isnt exchange-listed like an NYSE or AMEX stock is. Yet, these companies have met the quarterly reporting/disclosure requirements of the Securities Exchange Commission. These companies are said to be of a fully reporting status.
The bulletin board system does not rule the over-the-counter market. The pink sheet and on a technical basis, the NASDAQ, are also OTC markets.
When it comes to determining if an equity should be listed as a bulletin board stock or an exchange-listed stock, share price doesnt come into play. Specific market caps may be required, however.
Some bulletin board stock can be stronger and more productive than many exchange-listed stocks, so dont inherently steer clear of bulletin board names, or necessarily have blind faith in the stability of any exchange-listed stock.
The reason there is plenty of micro cap stocks with share prices over $5 are because price isnt considered when making that determination. Micro caps are simply stocks with market caps of $250 million or less.
Micro Caps can also trade on any exchange, so its status isnt based on whether its listed on the New York Stock Exchange. Its minimum requirement is only $25 million.
A Quadruple Summary
Penny stock, pink sheet, bulletin board, and micro cap four terms that are tossed around quite a bit as if they all meant the same thing. Theyre all quite unique though. If an investor chooses to overlook a particular stock because its not an attractive investment, thats fine. However, overlooking a stock simply because of a semantic misunderstanding could be a regrettable decision. Knowledge is power.
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