What are Pink Sheets?

Buying pink sheet listings is like shopping at a discount store…

Suppose you wanted to update your wardrobe but didn’t have the money to spend at a department store. Instead, you might choose to visit a discount store where you can buy items at a lower price. The tradeoff is that the quality of the clothing might not be as high, and the store may have a poor return policy. Discount shopping is kind of like buying pink sheet listings — Those stocks are often priced lower than those on major exchanges. And they’re also often from smaller companies that don’t have a proven track record.

The pink sheets are an over-the-counter market that allows companies to sell their stock without trading on a major U.S. stock exchange. The term pink sheets refers to the fact that the quotes for these listings used to appear on pink sheets of paper.

Unlike the stock for most major publicly traded corporations, pink sheet listings don’t appear on major stock exchanges like the New York Stock Exchange or the Nasdaq. Instead, these stocks trade on an over-the-counter market through a company called OTC Markets Groups Inc.

As an investor, the process of buying pink sheet stocks might appear to be quite similar to buying any other type of stock — They create an account with a brokerage firm, who executes the trade on their behalf.

But for the companies selling stock in the pink sheets market, the process is very different. Rather than being subject to the same rules as companies trading on major exchanges, pink sheet listings don’t require companies to disclose their financial statements.

The companies listed on the over the counter markets are often foreign companies, shell companies, or companies selling under $5/share (‘penny stocks’). Long ago these penny stocks traded for under $1, and that is how they got their name.

There are very few listing requirements for companies that choose to sell pink sheet stocks (aka pink companies). Companies can generally choose which information to disclose to the public. Individual investors can then see how transparent a particular company has decided to be.

The company that oversees pink sheet stock trading, OTC Markets Group Inc, categorizes stocks by the amount of information a company has disclosed. They use these tiers to caution investors about the safety of investing with a particular company. The tiers are as follows:

• No information: Companies that have decided not to provide current disclosure and financial information to the public. These stock listings appear with a stop sign.
• Limited information: Companies that have provided some financial information, but who may be in economic distress, filing for bankruptcy, or not up-to-date on their financial statements. These stock listings appear with a yield sign.
• Current information: Companies that are fully up-to-date on providing financial statements, disclosure statements, attorney information, and a company profile verified through OTCIQ.

An over-the-counter (OTC) stock is one that doesn’t trade on a major United States stock exchange for various reasons. Generally, these companies don’t meet the requirements of the major exchanges. They might be smaller companies, foreign firms, or simply don’t want to file the necessary paperwork with the Securities and Exchange Commission to trade on a major exchange.

Pink sheets are one specific type of stock that trades over the counter. Pink sheets have the lowest standards of all OTC stocks. These stocks generally consist of foreign companies, penny stocks (those that trade at a low price — generally 5 dollars or less), and shell companies (those that only exist on paper).

Unlike the stock for most major companies, you can’t buy and sell shares of pink sheet stocks on a major stock exchange. Instead, pink sheets are traded over-the-counter by a company called OTC Markets Group Inc.

Because the Securities and Exchange Commission doesn’t have the same filing requirements for pink sheet listings as it does for companies trading on a major exchange, information may be limited about these companies.

OTC Markets Group Inc. categorizes pink sheets companies based on the amount of information they disclose. Some companies choose to proactively release financial statements, even though they don’t technically have to. In other cases, companies choose not to release financial records. If that’s the case, OTC Markets Groups Inc. will indicate as much on their website.

The commission you’ll pay to buy pink sheet penny stocks depends entirely on the brokerage firm with which you choose to trade. Many online brokerage firms such as Fidelity and Charles Schwab offer commission-free trading, which also applies to over-the-counter trades.

Investors should be sure to verify the commission for their particular broker, as some may have commission-free trading, but not for over-the-counter stocks. For example, TD Ameritrade has no commission on domestic stocks, but a commission of $6.95 for over-the-counter transactions.

Perhaps you already own pink sheet stocks and want to sell them. The process of selling this type of stock is quite similar to buying it. You‘d place a sell order with your broker. A sell order comes in one of two forms:

• A sell limit order allows an investor to indicate the specific price they’ll accept for their shares. The transaction won’t go through if the price doesn’t match the one on the limit order.
• A sell market order allows an investor to sell their shares immediately at the current market price.

The pink sheets bring their own specific risk factors. First, due to the nature of the companies that sell their stocks in this over-the-counter market, pink sheet stocks are riskier than stocks you’d buy on a traditional exchange. These investments are considered speculative, which implies greater risk. These companies may not have the proven track record that others do.

The stocks are usually more ‘affordable’, but with a greater chance of losing their value. Not only are these stocks riskier, but they’re also less liquid (harder to sell). There’s a greater chance you won’t be able to find a buyer for your stock right when you want to sell it.

Another risk factor for pink sheet listings is that they aren’t subject to the same rules and reporting requirements as those traded in a major exchange. When a company sells its stock on a major exchange such as the New York Stock Exchange or the Nasdaq, it has to file certain paperwork with the Securities and Exchange Commission. This paperwork includes its financial statements that tell shareholders how the company is doing.

Pink sheet listings don’t have to abide by these filing rules. As a result, these companies may not have the same level of transparency with their investors.

Finally, because of the lack of transparency and regulation surrounding these stocks, there’s a greater chance for fraud and scams. Some companies or individuals may use these stocks as a money-laundering opportunity or to swindle money out of both investors and broker-dealers.