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Understanding the Dangers of Pink Securities

Pink Securities are Similar to a Lottery Ticket

Pink SecuritiesUnderstand pink securities are easy and the risk becomes immediately obvious.  The word pink comes from the way they were originally printed, which was on pink paper.  Penny stocks are another word for this type of security.  Also known as, OTC (Over The Counter) stocks, these companies have a very small market capitalization and are not monitored by the Securities and Exchange Commission (SEC), this means that there is a lot of risk associated and investors need to be extra careful.  Due to the reporting requirements, it is possible for companies to appear on a pink sheet that has already gone bankrupt.

 Pink Securities are Sometimes a Mystery

The lack of financial data associated with pink securities can make them a major gamble; this is why it is sometimes felt that these securities are similar to buying a lottery ticket.  Companies on the pink sheet may have stock prices that are only pennies; this is the epitome of a high risk investment.  A smart investor will only allow penny stocks to make up a couple percentage points of his or her complete portfolio.  The danger is that these companies can easily go bankrupt, but on the flip side the stock can jump from a value of pennies to a value of dollars.

Cheap penny stocks are a bit like gambling or playing the lottery, but with some effort, it is possible to obtain reliable financial information; it will not be readily available, but worth the time it takes to obtain the information.  The amount of money invested can be kept to a small amount and possibly turn it into a small fortune.  Pink securities are definitely a dangerous endeavor, but it is a necessary piece of a portfolio for any serious investor.

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