Stocks

The United States Securities and Exchange Commission is to take care of investors and to keep the stock market in order. There are a number of laws that fall under their jurisdiction, including the following acts.

Securities Act of 1933. This act was the first to actually attempt to regulate the stock market’s exchange of securities. It requires groups that put securities on the stock market to register with the SEC. These companies immediately gain more clout and credibility when they are registered with the commission. There are exemptions (which is where pink sheets and penny stocks come from), but overall, most companies have to be registered properly.

Securities Exchange Act of 1934. This act is also meant for regulation, but it was created to regulate the brokers and dealers that sell the stocks, rather than the companies that are offering the stocks. This act basically regulates the middle man so that they can’t and don’t cheat the investors.

Trust Indenture Act of 1939. This is a supplement to the 1933 act, where trustees are to be hired by companies offering the securities. These trustees work for the benefit of the shareholders.

Investment Company Act of 1940. This act is to protect investors from what are called “conflicts of interest” in the stock market. It requires all companies that offer securities and mutual funds to publicly disclose information about their company. This is meant to benefit both the company and the investors.

Investment Advisors Act of 1940. This act is meant to protect investors from financial advisors. These advisors are different than the brokers and such, because usually they are hired or sought by the investor in order to figure out the best way to invest their finances. These advisors are to be regulated and everything done by and through them are to be documented appropriately.

Sarbanes-Oxley Act of 2002. Remember Enron? They sold stocks even though their company was going way under, and fast. This act requires companies to be honest and public about their internal workings (similar to the Investment Company Act), but it also requires these companies to do internal audits on occasion. This was created to try and help restore confidence in the American stock market.

Credit Rating Agency Reform Act of 2006. This was created with the intention of encouraging competition in the credit rating market, which then increases accuracy and consistency of scoring. The credit report agencies cannot classify themselves as government agencies, and must register and be regulated by the SEC.

What Is a Pink Sheet Or a Pink Quote?

A Pink Sheet or Pink Quote is a list of stocks from Pink OTC Markets (hence the name) that lists most of what are called over-the-counter, or OTC, securities. Basically, these are less popular and/or lesser known than the stocks you see on the New York Stock Exchange (NYSE) or the Nasdaq. There are also a certain list of requirements that stocks and bonds need in order to be listed on the two major stock exchanges, and if a stock does not meet these requirements, then they are unable to be listed, and are instead put on these lists.

Contrary to what you may think, this is not a stock exchange in and of itself. A lot of the companies listed on these are in financial trouble, bankrupt, foreign interests, or “niche market” businesses.  These companies are not required to provide financial information through the Securities and Exchange Commission (SEC), which means that they are not being monitored by the SEC. That makes it a bit nerve wracking for some people, but other people don’t see that as an important part of the investment process. That’s up to your opinion and how you feel about your investments.

The businesses that are listed on the Pink Sheets are considered to be high-risk investments. If you noticed the list of common reasons for being on the list, you can see why. Will they tell you not to invest in these companies? No. But always make sure that you do your research before you make any sort of financial decision, no matter how much or how little risk may be associated with it. Make sure that the company or companies that you are considering investing in are financially stable before you put any amount of money into them.

To help you make decisions, Pink OTC Markets has created two tiers of “upper-level” stocks on their lists: these are referred to as the OTCQX and the OTCQB market tiers. Both are used to make the businesses listed on them more visible, because they are businesses that would meet certain criteria for the NYSE and the Nasdaq, but do not meet all of them (thus disqualifying them from being listed). The businesses also have to be operating normally. The businesses placed on these tiers are not as high of a risk as other businesses on the Pink Sheet.