What are Pink Sheets
Pink sheets are daily publications compiled by the National Quotation Bureau with bid and ask prices of over-the-counter (OTC) stocks, including the market makers who trade them. Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets also refer to OTC trading.
BREAKING DOWN Pink Sheets
Pink sheet securities are traded by brokers, or dealers, using the decentralized OTC market, such as the OTC Bulletin Board (OTCBB) or OTC Link LLC (OTC Link), both a part of the Financial Industry Regulatory Authority (FINRA). Restrictions to enter these OTC markets are very limited. In fact, OTC Link places no restrictions on securities that may be listed, and OTCBB only requires 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.
Beginning in 1999, technological advances in the sector allowed for the creation of the Electronic Quotation Service. This allowed quotes to be adjusted in real time instead of the previous daily release.
Often, the companies associated with the securities are too small in size to be listed on a larger exchange, such as the New York Stock Exchange (NYSE), or do not meet the requirements set forth to join. Generally, this is the market used for the purchase and sale of penny stocks. Additionally, information regarding the companies may be difficult to find due to spotty reporting of financial statements.
Understanding Penny Stocks
Penny stocks are securities that sell for very small sums of money. Shares often cost no more than a dollar each, at times reaching just shy of $5 per share. While the low price can result in big profits, these securities are considered very high risk. In fact, some penny stock companies have no assets, and provide no goods or services.
Even though most penny stocks trade through an OTC market, some are listed on a variety of exchanges, at times in foreign securities markets.
Due to their highly speculative nature, there are a variety of U.S. Securities and Exchange Commission (SEC) restrictions, regulations and requirements governing how penny stocks are traded by brokers. The majority of these requirements focus on consumer protection and education.
Penny stocks often carry heavier risk than regular stocks. Often, 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 a dollar. In these cases, investors may not have the proper information necessary to make sound investment decisions, or the financial foundation may be too shaky. Some stocks also represent fraudulent shell companies or companies that are nearly insolvent.
Types of Stocks Traded
Companies traded on the pink sheets vary almost as widely as those traded on traditional stock exchanges, with more than 10,000 listed on OTC markets as of January 2018. Investors can find ADRs of foreign large-, small- and micro-cap growth companies, community banks, and SEC reporting companies. All industries are also represented, from metals and mining to media to pharmaceuticals.