Ask TheStreet: In the Pink

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What is meant by "penny" or "pink sheet" stocks? Are they the same thing? Thanks, S.F.

The term "penny stock" has generally been used to describe low-priced securities issued by small companies. A penny stock is usually priced at less than $5 per share and is not traded on the Nasdaq or listed on a stock exchange where it may not meet listing requirements.

Instead, these often speculative stocks trade on another component of the over-the-counter market commonly referred to as the "pink sheets." Many years ago, the prices for these tiny stocks were disseminated on sheets of pink paper, hence the name. Unfortunately, the prices were often stale and investors would be forced to call their brokers, who would in turn call market makers to get the prices.

The name stuck, but the Internet has provided a much simpler way to get up-to-date quotes. Investors can now just go to PinkSheets.com for the latest quote.

But before heading over to the site, it's important to note that the Pink Sheets market is often referred to as the "Wild West" of markets in the U.S. Unlike the major exchanges, there are no minimum quantitative standards for a company to list its stock on the Pink Sheets.

In other words, buyer beware! And that is especially true when penny stocks are rallying.

"When you get down to the bulletin board, a lot of the trading is done by the public daytrader passing stocks and stories back and forth," says Phil Roth, chief technical market analyst at Miller Tabak. "And in this environment, when stocks have advanced for a long time and people have confidence, they will buy anything. A 10-cent stock can go to 50 cents, just for lack of sellers."