Pink sheet stocks are stocks that trade through the over-the-counter market or OTC rather than through a major stock exchange. The term “pink sheets” comes from the paper that stock quotes used to be printed on. Today, stock quotes and stock trading takes place electronically.
The over-the-counter market may appeal to smaller companies, companies that are reorganizing after bankruptcy or shell companies. A pink sheet stock does not face the same level of regulation as stocks from publicly traded companies that are traded on the New York Stock Exchange or NASDAQ.
A company may choose to sell shares on the over-the-counter market if it can not meet the listing requirements established by the Securities and Exchange Commission (SEC) or does not want the expense of going through the IPO process. Many pink sheet stocks are penny stocks.
Investors looking for bargain buys may consider dipping into the pink sheets market. But pink sheet stocks–and penny stocks, in particular — can be highly volatile so it’s important to understand both the risks and potential rewards.
What Is a Pink Sheet OTC?
Pink sheet stocks are those that trade over the counter, rather than via stock exchanges. OTC Markets Group provides quotes for pink sheet stocks, and broker-dealers execute trades directly with each other.
Pink sheet OTC trading happens on an open market that lacks the financial reporting rules mandated by trading on the NYSE, NASDAQ or another stock exchange. It’s not illegal, though the SEC warns investors to stay vigilant for potential scams or fraudulent trading involving the pink sheets market and microcap or penny stocks.
Listing Requirements
In order for a company to get listed on OTC pink sheets, they must file Form 211 with the Financial Industry Regulatory Authority (FINRA). Companies do this through a sponsoring market maker, or registered broker dealer firm. The sponsoring market maker accepts the risk of holding a certain number of shares in a pink sheet company to facilitate trading of those shares.
The Form 211 asks for financial information about the listed company. The broker dealer can then use this information to generate a stock price quote. Pink sheet over-the-counter stocks do not need to adhere to the same financial reporting requirements as stocks that trade on major exchanges.
Are Pink Sheets and OTC the Same?
Pink sheet stocks and OTC or over the counter loosely refer to the same thing: Trades that take place outside of the traditional stock exchanges. The company OTC Markets provides quotes for companies listed on the pink sheets, as well as the OTCQX and the OTCQB trading marketplaces.
The OTCQX allows for trading of companies that are not listed on traditional exchanges but still subject to SEC rules. The OTCQB includes emerging companies with a stock price of at least a penny that are not in bankruptcy, have a minimum of 50 beneficial shareholders who each own 100 shares, and annually confirm that information is up to date. Of the three, the pink sheet OTC marketplace has the fewest financial reporting requirements.
There are also companies that adopt regulatory and reporting standards to list with the Over the Counter Bulletin Board (OTCBB) system. This is another electronic stock quote system that displays stock prices for securities not listed on a national exchange. Since this requires regulation you wouldn’t find pink sheet stocks listed here.
Are Pink Sheets and Stocks the Same?
Pink sheet stocks are stocks, meaning each one represents an ownership share in a company. The primary difference between pink sheet stocks and other types of stocks, such as Blue Chip stocks, is how investors trade them. Investors trade pink sheet stocks over the counter, and other types of stocks on an exchange.
Pink sheet stocks may have much lower valuations than small-cap, mid-cap or large-cap stocks, or they may be newer companies that have yet to establish themselves in the market. This is why it’s possible to buy penny stocks or microcap stocks on the pink sheets for pennies on the dollar.
Pros and Cons of Pink Sheet Stocks
Pink sheet stocks have benefits and disadvantages, both for the companies that list over the counter and for investors. These may differ from exchange-traded stocks. Here are some of the most important pros and cons to consider when investing in pink sheet stock:
Benefits of Pink Sheet Stocks
From a business perspective, being listed on the pink sheets can save companies money, time, and headaches. Rather than going through the IPO process to become a publicly-traded company, pink sheet stocks circumvent the major stock exchanges and their listing requirements.
Foreign companies may choose the pink sheets to avoid SEC financial reporting rules. Additionally, companies delisted from a stock exchange may seek to trade on the pink sheets OTC market.
For investors, the appeal of pink sheet stock trading is the potential to pick up stocks at rock-bottom prices. If a company listed on the pink sheets takes off, that could result in significant profits for investors who bought in early. Because there are fewer reporting requirements, it’s possible to find a much broader range of stocks to invest in when trading on the OTC pink sheets.
Disadvantages of Pink Sheet Stocks
Trading on the pink sheets OTC can call a company’s reputation or credibility into question. Investors may wonder why a company is not seeking an IPO to get listed on a stock exchange or why a company has been delisted. That can make it difficult for a company to cement its footing in the marketplace and attract attention from new investors.
Investing in pink sheet stocks may have more risk than trading stocks on a major exchange, since there is less transparency around their finances. It can be difficult to “look under the hood” so to speak and get an accurate picture of a company’s fundamentals. That means investors are inherently taking on more risk when investing in the pink sheets simply because they may not know exactly what they’re buying.
In addition, pink sheet stocks may be thinly traded, meaning it can be more difficult to buy or sell shares. Allocating assets to pink-sheet stocks may not be appropriate for investors who want or need liquidity within their portfolio.
Finally, investors must consider the fees associated with trading pink sheet stocks, as fees can erode net returns and stock profit.
How to Find Pink Sheet Stocks
Finding pink sheet stocks can be as simple as searching the OTC Markets website. You can use the platform’s stock screener to filter for pink sheet stocks. The filter can tell you at a glance the stock’s ticker symbol, its country of origin, price and trading volume. You can also identify pink sheet stocks by looking for ‘PK’ at the end of their symbol on a stick ticker.
It may be helpful to use an online trading simulator to find pink sheet stocks. A simulator can help you to learn more about pink sheet stocks and penny stocks while simulating trades to estimate potential gains or losses. This can make it easier to familiarize yourself with how pink sheet stocks trade and what kind of volatility you might be able to expect before investing real money.
Pink Sheet Stock Investment Risks
Part of investing strategically means paying attention to risk management. Pink sheet stocks can present greater risk in a portfolio for a few reasons. For starters, there’s less liquidity surrounding these stocks due to lower trading volume. That could make it harder to unload shares of a penny stock or pink sheet stock if you decide that it’s no longer a good fit for your investment strategy.
The pink sheets market and over-the-counter trading in general can be more susceptible to stock volatility. Rapid price fluctuations could generate higher than anticipated losses if the price of a pink sheet stock nosedives unexpectedly.
Share dilution can also reduce the value of penny stocks or other pink sheet stocks. Dilution occurs when a company issues more shares of stock, watering down the value of the existing shares on the market.
Another issue with pink sheet stocks is that they can be susceptible to price manipulation or fraud. Unusual suspects might use shell companies, for example, to trade on the pink sheets for the purpose of laundering money or otherwise defrauding investors. Because there’s so little regulation and transparency surrounding these stocks, it’s important to do thorough research before investing to make sure the company is legitimate.
How to Invest in Pink Sheet Stocks
If you’re interested in investing in pink sheet stocks, you’ll need a brokerage account to get started. Specifically, you need a broker that offers pink sheet trading. Not all brokers offer this service so you may need to research different options for where to trade pink sheet stocks online.
Recommended: What Is a Brokerage Account?
Once you find a brokerage you can decide how much you want to invest in pink sheet stock. Given the higher degree of risk involved, it’s important to consider how much you could realistically afford to lose if a pink sheet stock or penny stock gamble doesn’t pay off. This can help you come up with a number to invest.
When choosing a broker, ask about any applicable commission fees. Brokerages may charge higher trading fees for pink sheet stocks versus stocks that trade on a major exchange, so it’s important to factor cost in when estimating your risk/reward potential.
Recommended: How to Open a Brokerage Account
The Takeaway
Investing in stocks may help you to build wealth for the long term. If you’re new to investing, you may want to start with trading stocks through an online brokerage account before diving into the over the counter market.
A great way to get started is by opening a SoFi Invest® online brokerage account. SoFi Invest makes it easy to begin building a portfolio of stocks, exchange-traded funds (ETFs), cryptocurrency and even IPOs.
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