Thursday, February 02, 2006

Another sign of decline: pink sheets?


Long ago I lost about $200.00 in pink sheets related to First Jersey Securities. The guy who headed that, you'll recall, did serious jail time...

nvestors are most familiar with American Depositary Receipts that trade on the New York Stock Exchange, the American Stock Exchange and the Nasdaq -- companies like Nokia or BP PLC...

But an even deeper pool of foreign stocks exists in the pink sheets, also known as over-the-counter (OTC) markets -- a negotiated market where stocks aren't listed on an exchange. According to the Bank of New York, a depositary bank for ADRs, there are 489 U.S. exchange-listed ADRs and 899 pink sheets.

Pink sheet stocks look and function the same as a normal ADR, but aren't listed in New York. Price quotes can be found on the OTC Bulletin Board, an electronic quotation service maintained by Nasdaq, or on the Pink Sheets, a real-time electronic quotation service for OTC securities.

Stocks, which can be bought from most brokers, are priced and quoted in U.S. dollars and settle in U.S. markets. Major depositary banks -- Bank of New York, J.P. Morgan and Citibank -- also list prices of many pink sheets.

For investors, pink sheets are a path to foreign stocks that cuts out the hassle and expense of dealing in a foreign market, even if no U.S. exchange listing is available. "The important thing for U.S. investors is they get a much more efficient way to buy and sell a security," said R. Cromwell Coulson, CEO of Pink Sheets LLC.

Of course, there is risk involved with buying shares that aren't listed on a major exchange. The listing requirements for most pink sheets aren't as strict as the Sarbanes-Oxley rules that govern U.S.-listed ADRs. That means investors may sometimes find less information on pink-sheet companies, said Todd Lard, director of Global Investing Services at Charles Schwab & Co.

Liquidity can also be an issue when dealing with nonexchange ADRs. "Depending on if they're really illiquid, the spread (the difference between bid and ask) will be pretty large. It can be difficult for a client to get in and out. With the more active pink issues, when you have liquidity, it's not more of an issue," Lard said.

The international markets have been where US investment capital's been going for quite a while; it's not surprising then, that in the search to find new outlets for money, there'd be a market for pink sheets- and (insert nostrum here about a "balanced" portfolio) money that would have gone to US markets (whatever the cap) would go to, yes, pink sheets...

And the thing is, it likely makes sense: pink sheets of foreign companies might represent less risk than say, a manufacturing concern in the US.

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