Pink Sheets: Listings for Stocks That Trade Over-the-Counter

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 stock shares in companies that cannot meet the requirements for listing on a major U.S. stock exchange like the New York Stock Exchange (NYSE).

Most pink sheet listings are low-priced penny stocks, meaning that they trade for less than $5 per share, and trading in pink sheet securities is often viewed as highly speculative.

Companies may choose to sell their shares through the over-the-counter network to avoid the costs and regulatory requirements for listing on a large exchange.

Understanding Pink Sheets

Pink sheets were named for the color of the paper on which quotes of share prices were published. Today's trades are electronic, but the name lives on as "Pink," a reference to over-the-counter stocks.

OTC refers to the trading for the securities of unlisted companies. The shares trade via a broker-dealer network rather than on a centralized stock exchange. OTC Markets Group is a company that organizes securities into three markets based on the quality and quantity of information companies disclose and uses OTC Link technology to process trades.

OTCBB vs. the Pink Sheets

There are two primary platforms for the listing of over-the-counter securities, OTCBB, and pink sheets.

Pink sheets are OTC but they are not OTCBB. 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).

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. NASDAQ provides the technology used to carry out the day-to-day functions of the OTCBB and OTC trade but the OTCBB business is owned and regulated by NASD, the National Association of Securities Dealers.

Pink Sheets and Penny Stocks

Pink sheet listings include penny stocks of small companies that do not need to file documentation with the SEC, however, Pink companies may publish disclosure through the OTC Compliance Unit and work directly with a broker-dealer to submit a Form 211 with FINRA.

These companies are smaller than those that list on the OTCBB. Pink sheet penny stocks trade infrequently and investors may have difficulty finding an accurate price or find it difficult to buy or sell when they want to enter into a trade.

Brokers of penny stocks charge wide bid-ask spreads, or price quotes, between the sell-side and buy-side. Penny stocks are generally considered highly speculative where investors may lose a sizable amount or all of their investment. Some penny stocks including pink sheet stocks have proven to be fraudulent shell companies or companies on the verge of insolvency.

OTCBB Listings

Compared to the major stock exchanges, there are few barriers to entry into the OTC markets. OTCBB requires only that updated financial reports be properly filed with the SEC, banking regulators, or insurance regulators.

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 $295,000 NYSE listing fee, or the Nasdaq fee, to be a financial barrier. Also, when a company's share price falls below a set level, such as $1, companies can be removed from a major exchange.

Some large international companies including the Swiss food conglomerate Nestle SA and the German pharmaceutical company Bayer A.G. thrive on the OTC platform. They list on their home country exchanges but may find the duplication of regulatory paperwork for a large U.S. exchange too onerous.

Bonds and derivatives also find a listing home on the OTC marketplaces.

SEC Regulation of Penny Stocks

Penny stocks often carry a heavier risk than stocks listed on the major exchanges. Stocks may fall to trading on the pink sheets after failing to meet SEC requirements for listing on larger stock exchanges. There are a variety of SEC restrictions and requirements governing how brokers trade penny stocks that focus on consumer protection and education.

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 and make it easy for an investor to afford a stake in the market and pink sheet transaction costs are often low.

However, pink sheets are prone to fraud and price manipulation due to the lack of financial information required to list and lack of regulation. There is less public information and transparency surrounding the companies, and shares often trade infrequently, making it hard to buy or sell when the investor wants.

Examples of Pink Sheet Securities

OTC Markets Group lists the most actively traded companies, including:

• Tencent Holdings LTD (TCEHY), the Chinese multimedia company
• BHP Group Limited (BHPLF), an Australian securities company
• Grayscale Bitcoin Trust (GBTC), an American Bitcoin trading platform

OTC Markets Group is one company that provides the SEC-regulated alternative trading system, OTC Link, to connect U.S. broker-dealers, providing liquidity and execution services for securities and investors have access to data on 12,000 securities. Companies choose to qualify for OTCQX or OTCQB markets or by default trade on Pink.