Amongst investors and traders, the penny stock index is the venue for microcap shares and penny stocks that go for as low as $5 per share. Many stocks actually sell for less than $1 in the market, which means that there are higher opportunities to make a profit. But before the term profit makes dollars go dancing in one’s head, beware as penny stocks are high-risk investments that require extreme care in choosing lest all the capital disappears like so much dust in the wind.

Pink Sheets Quotation System

First off, pink sheets are not a stock exchange per se. Instead, it is an electronic quotation system that serves as bridge between brokers and traders for over-the-counter stock trades. As such, the penny stock index have no central trading floor and stock exchange in the mold of the New York Stock Exchange.

Pros and Cons

Companies listed in the penny stock index have very basic listing requirements. For domestic companies, Form 211 is completed for submission to the OTC Compliance Unit while foreign organizations only need to show proof of compliance with their country of origin’s national stock exchanges and fill up the forms in English. Usually, these steps are conducted by a market maker in behalf of the company itself.

Also, the listed companies are not required to show their past and current financial statements as well as other relevant data. Many are willing to present these data for the general public while others may be reluctant to do so as it is not a requirement. In the penny stock index, the more that a company is wiling to have its background, reputation and performance investigated, the more likely it is a legitimate company just waiting for its big break, so to speak.

The penny stock index-listed companies are not required to file periodic reports with the Securities and Exchange Commission, thus, making it virtually impossible for an average investor to determine its financial performance. Add in the fact that many of these companies are very small in comparison with the, say, NYSE-listed corporations, are tightly held by a few owners and are also thinly traded and you have many reasons to shy away from penny stocks.

But there are also investment gems to be found in the penny stock index. Many of the listed companies are legitimate organizations with their products and services possessing great potential for profits once accepted by the industry in which the company operates in. The trick is in good research, analysis and evaluation using the various tools and techniques available in online sites and brokerage houses.

It also helps that the penny stock index has a classification system in effect that differentiates between domestic and foreign companies as well as high risk and low risk organizations. For the relatively risk-averse investor, this is a great way to prune down the penny stock and, thus, get to the meat of the matter as quickly as possible. After all, timing is almost everything when it comes to investing in highly volatile stocks like microcap shares.