Penny Stocks, Pink Sheets, Or Micro Caps What’s the Difference?
Its easy to use the term penny stock interchangeably with pink sheet. The same goes for bulletin board and micro cap. Unfortunately, investors are doing themselves a great disservice by mentally lumping all four distinct descriptions into one category. More specifically, investors may be overlooking tremendous opportunities by not acknowledging their differences.
Even if you know a little bit about each term, its worth the time to memorize the distinctions between each. In trading, the more you know, the better investments you can make.
Most of the time, traders dont consider a stock that trades over $1 a penny stock. Then there are others who define any stock less than $5 as one. There arent any ramifications for using either benchmark.
Though its slightly arbitrary, the $5.00 price level may have become the standard simply because thats the price under which many brokerage firms will not short a stock, or allow it to be margined. However, some brokerage firms have no price limit at all when it comes to shorting a stock. So, penny stocks can be sold short.
Often a stocks price sinks because a temporary situation has developed. It may even have met the same requirements as higher priced stocks at some point. A stock with this type of price movement could be a great investment opportunity when it trades as a penny stock”which can be a pink sheet or bulletin board stock (see below).
You may have been told to steer clear of pink sheet stocks because they often hold the most risk. Maintained by Pink OTC Markets Inc., some of them dont deserve their bad reputation.
Where a foreign company chooses to list their stock is not a gauge of credibility. For some technical or logistical reason, the stock cannot be listed with one of the exchanges or the bulletin board system.
One of the biggest downsides to pink sheet stocks is a lack of transparency. These companies arent required to report audited accounting statements, although many do anyway. If the stock youre considering discloses its business, it might be worth a second look.
On the other hand, if a stock trades on the OTC market, or as an OTCBB stock, you can be assured that these companies have met SEC requirements.
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.
Share price doesnt play a direct role in determining if an equity is listed as a bulletin board stock or an exchange-listed stock either. However, the exchanges (or the NASDAQ) have certain market cap requirements that may not be yet met by a bulletin board company.
Dont just assume that all bulletin board stocks lack the stability of exchange-listed stocks. You might find some hidden gems that are stronger and more productive.
Micro Cap ” The standard definition of a micro cap company is any company with a market cap (issued shares multiplied by share price) of $250 million or less, though the number isnt set in stone. Note that share price has nothing to do with the determination; there are plenty of micro cap stocks with share prices well over $5.00.
You may think that the companies listed on the New York Stock Exchange are bigger and stronger than all the others, but thats not true. The minimum market cap stands at $25 million, so even a micro cap stock can make the NYSE.
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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