What Are Pink Sheets?
Pink sheets are listings for stocks that trade over-the-counter (OTC) rather than on a major U.S. stock exchange. Many pink sheet listings are for stocks in companies that cannot meet the requirements for listing on a major U.S. stock exchange like the New York Stock Exchange (NYSE). Some companies choose to sell their shares through the over-the-counter network to avoid the greater costs and regulatory requirements for listing on an exchange.
Most pink sheet listings are low-priced penny stocks, meaning that they trade for less than $5 per share. Pink Sheets is also a private company that works with broker-dealers to market the shares of OTC equities they represent.
Trading in pink sheet securities is generally seen as highly speculative.
- Pink sheets are listings for stocks that trade over-the-counter (OTC).
- Pink sheet listings are not listed on a major U.S. stock exchange.
- Most pink sheet stocks are small-company penny stocks.
- Pink sheet stocks are highly risky due to a lack of regulatory oversight and low liquidity.
Understanding Pink Sheets
Historically, pink sheets got their name from the color of the paper on which quotes of share prices were published. Today's trades are, of course, electronic, but the name lives on as a reference to OTC stocks.
Over-the-counter (OTC) refers to the process of trading for the securities of unlisted companies. The shares trade via a broker-dealer network rather than on a centralized stock exchange.
Pink sheets are OTC but they are not OTCBB. That is:
- The Over-the-Counter Bulletin Board (OTCBB) is an electronic system that displays over-the-counter securities with real-time quotes and volume information. Shares listed on the OTCBB carry an "OB" suffix and must file financial statements with the Securities and Exchange Commission (SEC).
- Shares trading on the pink sheet platform have a "PK" suffix and are under no requirements from the SEC to file financial information. For this reason, they are seen as high-risk investments.
OTCBB vs. the Pink Sheets
There are two primary platforms for the listing of over-the-counter securities. The first is the OTCBB and the second is the pink sheets platform. Nasdaq operates the OTCBB which acts as a quotation service for over-the-counter sales. Shares are further divided between the OTCQX and the OTCQB platforms.
Pink Sheets is a private listing company for over-the-counter securities.
There are comparatively few barriers to entry on the OTC markets. OTC-Link places no restrictions on securities that may be listed, and OTCBB requires only that updated financial reports be properly filed with the SEC, banking regulators, or insurance regulators. These OTC markets give brokers and dealers a mechanism to list their current bidding and asking prices to complete transactions.
Many OTC stocks are issued by companies that are too small in size to be listed on a major U.S. exchange. They may find the $500,000 NYSE listing fee, or the $75,000 Nasdaq fee, to be a financial barrier.
Others have previously been listed on a major exchange but got kicked off it for failing to meet the exchange requirements. This can occur automatically when the company's share price falls below a set level, such as $1.
However, some very prominent foreign companies including the Swiss food conglomerate Nestle SA and the German pharmaceutical company Bayer A.G. use the OTC platform. They also list on their home exchanges and may find the duplication of regulatory paperwork too onerous.
Bonds and derivatives also find a listing home on the OTC marketplaces.
A penny stock refers to a small company's stock that trades for less than five dollars per share. Although some penny stocks trade on large exchanges such as the NYSE, most penny stocks trade via OTC or over the counter through pink sheet listings or the OTC Bulletin Board (OTCBB).
Pink Sheets and Penny Stocks
Pink sheet listings usually consist of even smaller-company stocks called penny stocks. These companies do not need to file the required documentation with the SEC. To list on the Pink Sheets a business must file Form 211, which includes some financial information, with the OTC Compliance Unit.
Companies are not obligated to make their financial situations transparent to investors or the broker-dealers who market their products.
These companies are even smaller than those that list on the OTCBB. Pink sheet penny stocks can trade infrequently resulting in a lack of liquidity. Because of the low liquidity, investors might have difficulty finding an accurate price and may find it difficult to buy or sell when they want to enter into a trade.
Due to their lack of liquidity, brokers charge wide bid-ask spreads, or price quotes, between the sell-side and buy-side. Penny stocks are generally considered highly speculative meaning investors could lose a sizable amount or all of their investment.
In these cases, investors may not have adequate information to make an investment decision about a penny stock. The company's financial situation might not be stable.
Some penny stocks including pink sheet stocks have turned out to be fraudulent shell companies or companies on the verge of insolvency.
SEC Regulation of Penny Stocks
Due to their highly speculative nature, there are a variety of SEC restrictions, regulations, and requirements governing how brokers trade penny stocks. The majority of these requirements focus on consumer protection and education.
Penny stocks often carry heavier risk than stocks listed on the exchanges. Usually, stocks wind up on the pink sheets for failure to meet SEC requirements for listing on larger stock exchanges, such as lacking financial information or their stock price falling below one dollar.
Pros and Cons of the Pink Sheets
Pink sheet listings offer small companies a chance to raise capital through the sale of shares to the public. These small firms sell their stock at a relatively low price, making it easy for any investor to afford a stake in the action and possibly make significant returns.
Because they do not charge the high listing fees of the large exchanges, pink sheet transaction costs are usually lower.
Pink sheets are prone to fraud and price manipulation due to the lack of financial information required to list. A listing could end up being a shell company without an active business or assets.
The shares trade thinly and infrequently, making it hard to buy or sell when the investor wants. Less regulation leads to less available public information.
Pink sheet listings provide small companies access to capital funding.
Low share prices leave room for fast gains if the company succeeds.
Transaction costs are lower since companies do not pay expensive exchange listing fees.
Fewer regulations and requirements can lead to outdated or incorrect information given to the investor.
Pink sheet stocks trade thinly making it hard for an investor to buy or sell shares at will.
Pink sheet listing is prone to fraud.
Real-World Examples of Pink Sheet Securities
OTC Markets Group operates the OTCQX financial markets through "otcmarkets.com" and lists the most actively traded companies.
On a given day, the total dollar volume can exceed $1.2 billion with more than six billion shares trading hands. Companies listed via pink sheets include:
- Tencent Holdings LTD (TCEHY), the Chinese multimedia company
- Nestle SA (NSRGY), the Swiss food and beverage giant
- Bayer A.G. (BAYRY), the German healthcare company
Large companies such as Tencent Holdings have a significantly higher trading volume than smaller companies, making them more liquid and easier to trade. For example, on March 22, 2019, Tencent Holdings had 4.2 million shares traded while a small pink sheet company called Pacific Software (PFSF) only traded 200 shares for the same day with a daily price range of only 20 cents.