What Are Pink Sheet Stocks?

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DEFINITION

Pink sheet stocks are traded in over-the-counter marketplaces rather than in exchanges like the New York Stock Exchange (NYSE). The quotes for these kinds of stocks used to be printed on pink paper. This is how they came to be known as "pink sheets."

Definition and Example of 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 companies aren't listed on the major exchanges, and they're not subject to the same sort of financial reporting as publicly traded companies on major exchanges. Publicly traded companies must file with the Securities and Exchange Commission (SEC). Pink sheet stocks may be young or small, or they might simply not want to file the kind of financial reports that other exchanges require. They're traded directly and now compiled electronically.

  • Alternate name: OTC stocks

Pink sheet stocks are thinly traded, which can result in higher trading costs. There can be longer waiting periods before a seller can find a buyer. For example, some small-cap penny stocks are pink sheet stocks because they trade at very low prices.

How Do Pink Sheet Stocks Work?

You can find quotes for pink sheet stocks through the OTC Markets Group. The OTC operates three tiers of trading marketplaces. The OTCQX requires a qualitative review performed by the OTC Markets Group. The OTCQB mandates a price of at least one penny and an annual certification that the company's information is up to date. Pink is the third. It's an open market with no reporting rules.

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

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

Buying or selling a pink sheet stock requires a broker. The broker will arrange the deal if they can find a willing buyer or seller. This may take some time. It takes longer to fully vet and research pink sheet stocks. Data isn’t readily available.

Foreign companies that want to restrict their financial and accounting disclosures may opt for pink sheet status. Nestle, for example, trades over the counter.

Advantages and Disadvantages of Pink Sheet Stocks

Advantages
  • Often low-priced

  • A chance to capitalize on growth

Disadvantages
  • Limited information

  • High risk

  • High volatility

Advantages Explained

  • Often low priced: Many pink sheet stocks trade for less than $5. Some trade for less than $1, making them very affordable.
  • A chance to capitalize on growth: Emerging companies are sometimes traded first on the pink sheets for low prices. Early investors can capitalize as the companies experience growth. Some go on to trade on major exchanges.

Disadvantages Explained

  • Limited information: These stocks are hard to vet, because they don't have to file financial information.
  • High risk: They tend to be highly illiquid, according to the SEC. They're often targets for stock-manipulation schemes. The outcomes for trading these stocks tend to be poor 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 that there can be a great deal of volatility in returns.

What It Means for Individual Investors

Set up a “phantom,” demo, or practice trading account before you tackle pink sheet stocks with real money.

Trading simulators let you trade pink sheet stocks in real time. You can conduct research, build a portfolio, and monitor your trading progress without any risk.

You can try buying and selling pink sheet stocks with real money when you feel comfortable trading pink sheet stocks with imaginary cash. Use a reputable online stock market brokerage firm that offers access to the over-the-counter trading market. Brace yourself for the higher fees and unique charges that come with pink sheet trades. Make sure you know in advance just how steep those charges will be.

Risk often outweighs reward when you're trading pink sheets. Do your homework to reduce your risk as much as possible.

Key Takeaways

  • Pink sheet stocks are traded over-the-counter rather than on major stock exchanges.
  • They have few if any financial reporting requirements, making them very risky to trade.
  • The U.S. Securities and Exchange Commission (SEC) warns that over-the-counter stocks tend to be highly illiquid and volatile.
  • These stocks are often the targets of manipulation and scams.
  • Use great caution, and do your due diligence on the companies involved if you want to trade pink sheet stocks.

Article Sources

  1. OTC Markets. "Reporting Standards."

  2. U.S. Securities and Exchange Commission. "Over-the-Counter Market."

  3. U.S. Securities and Exchange Commission. "Outcomes of Investing in OTC Stocks." Page 1.