How to Trade the Pink Sheets(This is not about which stocks to buy, just "how to trade" them!)Silver Stock Reportby Jason Hommel, May 27th, 2008How to Trade Canadian Stocks in the U.S. using the pink sheets. Residents in the U.S. generally cannot buy Canadian stocks directly and often need to buy Canadian stocks through the pink sheets. Here's how to do that most effectively. First, you need to open an account and deposit money with a stock
broker, of course. See: Funding your account can take up to a week. Generally, you need at least $2000 to open an account. Next, find out the pink sheet symbol. You can usually find the symbol at Yahoo! Finance at http://finance.yahoo.com/ or pinksheets.com Simply click on "Symbol Lookup" and enter in the company name. Many Americans then simply place market orders using the pink sheet ticker symbol, and then get ripped off because they pay way too much, or they push the price up too much, too fast. Here's how to determine a good price for a limit order, and avoid paying too much. First, pink sheet prices are quoted in U.S. dollars, not Canadian dollars. Pink sheet prices are also generally not updated except once a day, or once every two days. Therefore, never rely on delayed or outdated pink sheet price quotes. To get the price of the pink sheet stock, first look up the stock price using the Canadian symbol for use on the Canadian exchanges. I use Yahoo! Finance. That price is still not the price. The price is either the bid, or the ask, depending on if you are buying, or selling, or in a hurry, or are patient. The bid is what someone is willing to pay for the stock, and the ask is what someone who has stock is asking to receive for their stock. The difference between the bid and the ask is called the "spread". If you want the stock now, you have to pay the higher price, the ask. If you are willing to wait until a desperate stock seller sells "at the market", you can try to place a limit order at the "bid", or maybe one penny higher or lower. If you buy the stock now at the ask, and turn around and sell a minute later to the highest bidder, you end up paying the spread. And you are like a retail buyer. If you manage to buy a stock on the bid, and turn around and manage to sell it at the ask a minute later, you end up earning the spread. And you are like a wholesaler, or store manager, or a "market maker". So, if you are buying on the pink sheets, and want to buy a stock "now", you need to see what the "ask" price is on the Canadian price quote. (Remember, most free quote services' stock prices are delayed by 15 minutes.) Then, you need to multiply by the exchange rate. The place I use to determine the rate is the bottom of kitco.com. But that is not the true exchange rate either; that price is actually the middle in between the bid and ask. (There are always two prices.) So, to get the price in U.S. dollars, you take the Canadian dollar share price (bid or ask), and either multiply or divide, depending on the number you use. That is close to the true "pink sheet price". Again, do not rely on the pink sheet price quote, which can be 24-48 hours old. However, just as your broker typically charges you a commission, so,
too, you need to add in a commission for the broker who will make the
trade on the Canadian exchange for you, to give you your "pink sheet"
shares. To recap: To buy on the pink sheets, you need to find the symbol at Yahoo! Finance, or at "pinksheets.com". Next, find the Canadian symbol, and find the Canadian bid, or ask. Next, find the exchange rate, at kitco.com Next, multiply the Canadian price by the exchange rate to U.S. dollars. Next, add a penny or two if you are buying, and subtract a penny or two if selling. Next, place your limit order on the pink sheets. And that's it! Additional information: As an American, the U.S. government tries to protect you, and your dollars. The U.S. government, which champions "free trade" does not want you to trade Canadian stocks, "for your own protection." However, the U.S. brokerage industry will accomodate you. They do this through the "pink sheets". The "pink sheets" are an informal electronic exchange, with no exchange rules, and no company reporting requirements. This does not mean that the Canadian stocks traded in the U.S. on the pink sheets do not report; they just don't report to the U.S. exchange nor SEC. They report in Canada, according to Canadian laws. Pink Sheet stock is the same stock that trades in Canada. It has the same liquidity as stock in Canada, despite what the pink sheet volume says. Generally, there may be a slight delay when trading on the pink sheets, since your order goes through one additional broker, who must "broker" your stock trade between the two exchanges. In my experience, this can take up to half an hour even if my bid is above the ask price, but it can also happen in a few seconds. Americans generally like to place "market orders". But we should avoid that, and use limit orders, and decide our limit using the process outlined above. Why? Because Canadian stocks are often not very liquid, and pre-placed bids and asks might not be very large, or deep. (Remember, Americans in total are wealthier than Canadians, and we are also less patient.) Therefore, the bids and asks can get "chewed through" very quickly, and Americans tend to move the prices up and down too much, too quickly, when buying and selling. Therefore, Americans should try to pay attention to the volume of stocks, and spread out buy orders and sell orders over a few days, or weeks. In this way, you can try to buy on the bid, and sell on the ask, and earn extra money by being patient. In my opinion, people in our industry need to learn to trade better, by selling at peaks, and buying on dips. Not only is this very profitable, but it also does several positive things for the entire industry, as follows: 1. It makes the peaks less tall (because you are
selling). Increased trade can be a great source of income. Witness the concentrations of wealth in cities devoted to trade: Hong Kong, New York, etc.
Jason
Hommel |