What Are Pink Sheet Stocks?

Definition & Examples of Pink Sheet Stocks

An investor and advisor discuss stocks
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Pink sheet stocks are stocks traded in over-the-counter marketplaces rather than exchanges such as the New York Stock Exchange (NYSE).

Because pink sheet stocks are traded directly, these securities aren't subject to the same sort of financial reporting as publicly traded companies trading on major exchanges, which must file with the Securities and Exchange Commission (SEC).

Although they're now compiled electronically, the stock quotes for these kinds of stocks used to be printed on pink paper, which is how they came to be known as "pink sheets."

Learn more about pink sheet stocks, over-the-counter trading, and the unique risks involved in buying or selling these securities.

What Are Pink Sheet Stocks?

Pink sheet stocks are securities that are traded on over-the-counter (OTC) platforms such as OTC Markets (formerly known as The Pink Sheets). These stocks represent companies that aren't listed on the major exchanges. The companies may be young, small, or simply uninterested in filing the kind of financial reports other exchanges require.

In general, pink sheet stocks are thinly traded, which can result in higher trading costs and longer waiting periods before a pink sheet stock owner can find a buyer.

Some pink sheet stocks may trade at very low prices, earning them the name penny stocks.

  • Alternate name: OTC stocks

How Do Pink Sheet Stocks Work?

You can find quotes for pink sheet stocks through the OTC Markets Group, which operates three tiers of trading marketplaces:

  • OTCQX, which requires a qualitative review performed by OTC Markets Group
  • OTCQB, which requires a minimum price of one penny and annual certification that the company's information is current
  • Pink, which is an open market with no reporting requirements

These OTC platforms don't require the same kind of financial reporting as the major exchanges do. These platforms are decentralized networks of brokers and dealers and they're strictly electronic, with no trading floor.

There is another over-the-counter quotation service called OTCBB, which is operated by the Financial Industry Regulatory Authority (FINRA). Securities must be registered with the SEC in order to be quoted on the OTCBB.

To buy or sell a pink sheet stock requires a broker, who will arrange the deal provided they can find a willing buyer or seller, which may take some time. Also, it takes longer to fully and accurately vet and research pink sheet stocks, as data isn’t readily available.

By and large, pink sheets are too small to be listed on more prominent exchanges, but that’s not the only reason 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.

Often, foreign companies that seek to restrict their financial and accounting disclosures will opt for pink sheet status instead. For example, Nestle trades over the counter.

Advantages and Disadvantages of Pink Sheet Stocks

Advantages
  • Frequently low priced

  • Opportunity to capitalize on growth

Disadvantages
  • Limited information

  • High risk

  • High volatility

Advantages Explained

Frequently low priced: Many pink sheet stocks trade for less than $5, and some for less than $1, making them affordable to buy.

Opportunity to capitalize on growth: Sometimes, emerging companies are first traded on the pink sheets for low prices. As they experience great growth, early investors are able to capitalize. Some of these companies go on to trade on major exchanges.

Disadvantages Explained

Limited information: Because they aren't required to file financial information, these stocks are difficult to vet.

High risk: According to the SEC, these stocks tend to be highly illiquid, in addition to being potential targets for stock manipulation schemes. Outcomes for trading these stocks tend to be negative, particularly if the stock has weak disclosure requirements or was the subject of a promotional campaign.

High volatility: The nature of over-the-counter trading means there can be significant volatility in returns for pink sheet stocks.

How to Trade Pink Sheet Stocks

Before you get up and running with pink sheet stocks, set up a “phantom,” demo, or practice trading account first.

Such trading simulators 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, you can try buying and selling pink sheet stocks with real money. Use a reputable online stock market brokerage firm, which offers 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 steep those charges can be.

When trading pink sheets, risk often outweighs the reward, so investors need to do their homework to reduce their risk as much as possible.

Key Takeaways

  • Pink sheet stocks are traded over-the-counter instead of on major stock exchanges.
  • Pink sheet stocks have little to no financial reporting requirements, making them very risky to trade.
  • The U.S. Securities and Exchange Commission also warns that over-the-counter stocks tend to be highly illiquid and highly volatile, and are frequently the target of manipulation and scams.
  • Investors who want to trade pink sheet stocks must exercise great caution and do their due diligence on the companies involved.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. OTC Markets. "Reporting Standards." Accessed Aug. 31, 2020.

  2. FINRA. "OTCBB Frequently Asked Questions." Accessed Aug. 31, 2020.

  3. U.S. Securities and Exchange Commission. "Outcomes of Investing in OTC Stocks." Accessed Aug. 31, 2020.