What Are Pink Sheets?
Pink sheets refer to a listing service for stocks that trade via over-the-counter (OTC). Pink sheet listings are companies that are not listed on a major exchange like the New York Stock Exchange (NYSE) or Nasdaq. The majority of stocks sold over-the-counter are low-priced penny stocks, meaning that they trade for less than five dollars per share. However, there are a large number of companies not considered penny stocks that merely opt to sell their shares through the over-the-counter network to keep share distribution activity inexpensive. 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 seen as highly speculative.
- Pink sheets refer to a listing service for stocks that trade via over-the-counter (OTC).
- Pink sheet listings are companies that are not listed on a major exchange like the New York Stock Exchange or NYSE.
- Pink sheet stocks are usually small penny stocks, which are stocks that trade for less than five dollars per share.
- There are several risks involved in trading pink sheet stocks, which include less regulatory oversight and a lack of liquidity.
Understanding Pink Sheets
Historically, the pink sheets receive their name from the color of paper on which quotes of share prices were published. Today, the trades are no longer paper but electronic quotes. However, the name still refers to OTC stocks as pink sheet listings.
Not all companies choose to on a major stock exchange. There may be a variety of reasons for this, but the biggest reason is the cost. The process and fees for listing can be prohibitive to smaller companies.
Over-the-counter (OTC) refers to the process of how securities of unlisted companies trade. These investments trade via a broker-dealer network as opposed to a centralized exchange like the Nasdaq and NYSE.
Pink sheet securities trade on the Over-the-Counter Bulletin Board (OTCBB). The 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) Those shares trading on the pink sheet platform have a "PK" suffix and no requirements from the SEC to file financial information, and for this reason, are seen as higher risk securities.
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.
Restrictions to enter OTC markets are limited. OTC-Link places no restrictions on securities that may be listed, and OTCBB only requires updated financial reports to 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.
OTC stocks are often considered securities that are too small in size to be listed on a larger exchange and those which have moved from the traditional exchanges. Additionally, these shares may not meet the requirements to join the exchange. Further, many companies find the $500,000 NYSE listing cost—up to $75,000 for a Nasdaq listing—as a financial barrier.
As a result, OTC listings can consist of companies of all sizes. Some large foreign companies including Nestle SA and Bayer A.G. trade via the OTC platform. 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 Sheet Listings
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 needed to make sound investment decisions. Also, the company's financial situation might not be stable. Some penny stocks including pink sheet stocks can be nothing more than fraudulent shell companies or companies that are nearly insolvent.
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 regular stocks. 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 many 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 of the action and possibly make significant returns. Because they do not charge the high listing fees of the large exchanges, the pink sheet transaction costs are usually lower.
Pink sheet stock is prone to fraud and price manipulation due to the lack of financial information required to list. Many companies could end up being shell companies without active business or assets. These shares trade thinly and infrequently making it hard to buy or sell when the investor wants. Less regulation leads to less available public information, the chance of outdated information, and the possibility of fraud.
Pink sheet listings provide small companies access to capital funding through public stock sales.
Low share prices can leave room for expansive share appreciation if the company succeeds.
Trade transaction costs are less 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.
Pink sheet listing is prone to fraud and the listing of shell companies.
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 over 6 billion shares trading hands. Companies listed via pink sheets include:
- Tencent Holdings LTD (TCEHY), the Chinese multimedia company
- Nestle SA (NSRGY), the food and beverage giant
- Bayer A.G. (BAYRY), a health care company
Large companies such as Tencent Holdings have a significantly higher trading volume than smaller companies making the larger companies 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.