What Are Pink Sheet Stocks, and Are They Worth the Risk?
Investors looking to grab some potentially lucrative stocks on the cheap often turn to so-called “pink sheet" stocks—publicly traded companies that don’t meet standard financial regulatory requirements and that aren’t filed with the U.S. Securities and Exchange Commission.
If that doesn’t sound like a particularly reliable stock trading option, that’s because in many cases, they’re not—although that doesn’t mean diligent investors can’t find hidden treasures in the pink sheet stock sector.
The name “pink sheets” is derived from the fact that they’re printed on pink paper, and that’s not the only unique item surrounding these controversial small stocks. Pink sheet stocks have been around Wall Street since 2013, when they were introduced to the investing public by the National Quotation Bureau. Pink sheet stocks have undergone myriad iterations over the years, including several name changes (from Pink Sheets to Pink OTC Markets in 2008, for example, and to the OTC Markets Group in 2011.) These days, pink sheet stocks are traded electronically, on the over-the-counter trading marketplace, with no physical trading floor involved.
Consider these additional facts about pink sheets:
- By and large, pink sheets are too small to be listed on more prominent exchanges, but that’s not the only reasons publicly traded companies go pink. Often, companies don’t want to go public with their financial records, and they don’t want to file with the SEC.
- Pink sheet stocks are often referred to as “penny stocks” due to their often-miniscule financial value.
- Often, foreign companies that seek to restrict their financial and accounting disclosures (Nestle SA is a good example) will opt for Pink Sheet status.
- Pink sheet-listed firms don’t have any formal requirements to be listed, aside from the filing of Form 211 with the OTC Compliance Unit.
High Risks Linked to Pink Sheet Stocks
Due to the fact that pink sheet stocks try to hide their financial statements, and they seek to avoid any regulatory scrutiny, pink sheet stocks are difficult to vet, and are consequently a risky investment proposition as a result.
Pink sheets are also classified by financial regulators as ultra-risky. Basically, the over-the-counter trading markets are broken down into three separate categories, and are ranked by the volume and accuracy of information provided about specific OTC stocks:
- OTCQX stocks are rated as the “highest quality” PTC stock.
- OTCQB stocks are rated next highest, and largely consist of younger company’s dependent on venture capital funding, which is monitored by the U.S. government.
- OTC Pink stocks are rated the lowest, and are classified in the “speculative” investing category by Uncle Sam.
In general, pink sheet stocks are thinly traded, resulting in higher trading costs and longer waiting periods before a pink sheet stock owner can find a buyer. Time is also a factor when undergoing pink sheet stock research—it takes longer to fully and accurately vet and research pink sheet stocks, as data isn’t readily available.
Potential Upside for Pink Sheet Stocks
That doesn’t mean you can’t make money off of pink sheet stocks. You can, in fact, if you stick to the script and look for the following characteristics that point to a potentially profitable penny stock:
- The company has achieved decent market share in a market where demand is high.
- The company is well managed, and has a proven track record of prudent spending, decent revenues, and is managed by executives with their own track record of success at other firms.
- The company has a proven track record of obtaining profit-driving documentation, like patents, trademarks, and copyrights—a good showing in the intellectual property arena often translates into a company with in-demand products and services that boost revenues.
- The company has a solid marketing and advertising budget. Are the company’s products and services visible in T.V., radio, and/or social media? If so, you know money is being poured into the company brand, and that’s a sign if potential long-term sustainability.
- The company has a track record of being followed by investment industry analysts, and has a history of share price momentum and positive trading moving averages.
Pink Sheet Trading Tips
To get up and running with pink sheet stocks, it’s highly advisable to set up a “phantom” trading account first, i.e., a ghost account that helps your practice trading pink sheet and penny stocks without using real money. Phantom accounts enable you to trade pink sheets stocks in real time, conduct research, build a portfolio, and monitor your portfolio trading progress, without any risk.
Once you feel comfortable trading pink sheet stocks with imaginary cash, but with documentable results, (and with full recognition of the inherent risks involved) you can stick your toe into the trading waters and buy and sell pink sheet stocks in small increments, with real money.
When you’re ready to go “live” and actually trade pink sheet stocks, take advantage of reputable online stock market brokerage firms like Scottrade and E*Trade, which offer investors access to the over-the-counter trading market. In doing so, brace yourself for higher fees and unique charges that accompany pink sheet trades, and make sure to check beforehand how onerous those charges can be.
The takeaway? Successfully investing in the pink sheets markets is all about separating the wheat from the chaff, and doing so on a regular basis. That’s no easy task in a market where most securities are high risk, and in a market that’s thinly traded.
Those are the main risks in the pink sheets sector where risk often outweighs reward, and where investors need to do their homework to earn a profit—every time they buy or sell a pink sheet stock.