In my article about Fannie Mae and Freddie Mac, I casually mentioned that both stocks were delisted from the NYSE in 2010. But what exactly happens to the share of a stock after it has been delisted from a major exchange? Before I tell you the answer to this question, you need to take a minute and look around your cubicle or your office and make sure nobody is listening. If you are at home, take a glance out the window and make sure the neighbors are not snooping. If you’re at Starbucks, shoot a quick look over your shoulder and make sure that someone is not eavesdropping.
OK, all clear? Good. Because I could get blacklisted for even talking about this subject. Motley Fool specifically told me not to write about it. My trading platform, eOption, specifically banned trading these types of stocks. In fact, I’m not entirely comfortable calling them by name for fear that these stocks will somehow start showing up in my dreams Freddie Krueger-style. But I talk in great detail about these stocks in my book, (which is on sale for the next three days for up to 60% off), so here’s an excerpt:
The Pink Sheets
While learning about the different stock exchanges and the listing requirements for each, I kept coming across references to the pink sheets. Article after article warned of investing in the pink sheets as if it were a godless, lawless, Wild West of a stock exchange that ate investors alive! I previously mentioned that the Nasdaq and the NYSE have rigorous listing requirements for their stocks, such as mandatory quarterly financial reporting to the Securities and Exchange Commission. But what happens to a public company that can’t or won’t meet the listing requirements of the major exchanges? More than likely, that company will trade on the OTC Market. In the past, prior to real-time online quotes, the OTC Market issued daily stock quotes on pink-colored paper, hence the name “pink sheets.”
My first impression of the pink sheets was that it was a black hole for money that should be avoided at all cost. However, I quickly learned that a much better analogy was that of a shark tank. It is very easy to get torn to shreds in a tank of sharks. A shark tank would be a terrifying and dangerous environment—unless you are a shark. If you are a shark, the tank is just a tank, and you might even get fed a bit of fish if you are patient. Before I go any farther, I want to make sure that I convey the dangers of investing in the pink sheets. All the risks of the large exchanges are amplified in the pink sheet shark tank. I will do my best to describe all the ways that a naïve investor can get shark-bitten, then I will tell you how I made a lot of money as a shark.
Trading the pink sheets is not for the faint of heart. If you have ever traded pink sheet stocks, odds are you have either made a killing (like I have) or you have gotten torn to shreds. If you happen to be one of the people that has lost money trading the pink sheets, trust me: you are not alone. The volatility and shenanigans that occur with pink sheet stocks are unlike anything you will ever see trading stocks on legitimate stock exchanges.
The biggest thing to understand about trading the pink sheets is that all of the valuation metrics that I write about in my Motley Fool analysis articles go straight out the window. Pink sheet companies are not required to fully report information to shareholders, and the information that they do report is often not audited or regulated in any way. A main theme of my book (up to 60% off now to Sunday!) is that the stock market moves because of two things: the fundamental performance of companies and the psychology of traders. However, since the fundamental performance of most pink sheet “companies” is nearly nonexistent or unclear, trading on the pink sheets is virtually 100% based on market psychology.
After several years of experience trading pink sheet stocks, I have come to believe that only a very specific type of trader that understands the nuances of market psychology and has the discipline to effectively trade the opportunities it creates can trade the pink sheets successfully. In my book, I have an entire chapter devoted to the pink sheets and how I have made big money trading these companies. There’s also an entire chapter devoted to market psychology and how it can be used to understand seemingly random moves in any stock, from the smallest pink sheet stock all the way up to Wells Fargo, Apple, or other large cap stocks.
If the stock market seems random to you sometimes, trust me: it’s not. Want to learn how to understand why the market moves the way it does? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
I think that’s enough pimping my book for today. And this is certainly enough talking about the pink sheets for now. It’s time to get back to analyzing Goldman Sachs’ and JP Morgan’s price to tangible book ratios for Motley Fool. My editors love that stuff! And it doesn’t matter how much money I’ve made trading, they don’t want to hear anything about the market of which we do not speak…