Pink sheet stocks are stocks that trade through an over-the-counter (OTC) market rather than a major exchange such as the Nasdaq (NASDAQINDEX:^IXIC) or the New York Stock Exchange (NYSE). Over-the-counter is another term for off-exchange. It means that transactions occur directly among dealers, which are usually brokerages.
The pink sheets market gets its name from the fact that its stock quotes used to be published on actual pink paper, although trading has since gone electronic. OTC Markets Group (OTC:OTCM) is the company that provides the OTC listings, but the “pink sheets” name is still frequently used when referring to the market or the stocks that trade on it.
Many stocks listed on the pink sheets are penny stocks, which have very low market capitalizations and share prices — usually less than $4. But they’re also very volatile and therefore riskier.
Some reputable foreign companies may opt to have their shares traded through the OTC market because they can avoid reporting to the U.S. Securities and Exchange Commission (SEC). Volatile penny stocks and companies that don’t adhere to SEC reporting requirements are also prevalent in the OTC market. That’s why pink sheet stocks have a reputation for being riskier.
How do pink sheet stocks work?
The process of buying and selling pink sheet stocks through a brokerage platform is generally similar to buying and selling stocks that are listed on major exchanges. But some key differences impact trading flexibility and total returns.
Many brokerages have moved to commission-free trading for stocks listed on major exchanges, but most still charge fees for OTC trades. Investors also don’t have the option to enter buy or sell market orders for pink sheet stocks. That means you can’t simply have your bid matched to the current asking price or vice-versa. Instead, you typically have to submit a limit order, and, in the process, manually enter your desired purchase or sale price.
Disadvantages and advantages of pink sheets
It’s very common for pink sheet stocks to offer little or no visibility into the operations and accounting of the business.
Most have low trading volumes. Trading commission fees. Elevated risks along with high volatility profiles of pink sheet companies can generate massive losses.
The pink sheets market provides access to a wider range of stocks.
Companies that can’t or don’t want to list on a major exchange can make their stock available to investors.
For investors with high-risk tolerances, volatility and low-dollar-value share prices create the potential for big gains.
Why companies use pink sheets
There are more than 10,000 stocks trading in the OTC markets. A company may list in the pink sheets for a variety of reasons. Some of these reasons can be viewed as legitimate from a traditional investing standpoint, while others may raise red flags.
Nissan Motor Company (OTC:NSANY) and Nestle (OTC:NSRGY) are two good examples of legitimate large-cap corporations trading on the pink sheets. The “Y” at the end of their ticker symbols indicates to investors that they’re foreign stocks.
Other companies trade on the pink sheets after being delisted from a major exchange. This can happen for a variety of reasons — for example, the company’s share price may have fallen below $1 or it may have failed to pay the necessary fees.
With the lack of financial standards or reporting requirements associated with the OTC markets, many companies with low-priced stocks choose to list in the pink sheets. These may be simply shell companies that exist for the sole reason of scamming investors into buying worthless shares.
Pink sheets and penny stocks
There’s a fair amount of overlap between pink sheet stocks and penny stocks. Many penny stocks (shares that trade for $5 or less) are pink sheet stocks, though pink sheet stocks also include higher-priced shares that don’t meet or don’t want to meet regulatory requirements for trading on an exchange. Still, many pink sheet stocks are penny stocks themselves.
The key distinction is that “pink sheets” refers to how a stock is traded (over-the-counter). “Penny stocks” refers to the share price of a given company.
While most penny stocks are considered speculative, not all pink sheet stocks are speculative. There are a variety of reasons why a company may trade off the exchange; many companies that trade over the counter are financially sound.
The pink sheets don’t have stringent regulatory requirements, which explains why you’ll find penny stocks listed there. A lack of reporting standards makes investing in pink sheet stocks a risky investment. It’s also why you’ll find a large population of penny stocks as part of the pink sheet catalog.
When can I buy pink sheet stocks?
Pink sheet stocks can usually be traded from Monday through Friday between 6 a.m. and 5 p.m. ET. This differs from the major U.S. exchanges, which are open between 9:30 a.m. and 4 p.m. ET on weekdays.
Is there a difference between pink sheets and OTC?
Stocks that trade over the counter are broadly referred to as “pink sheets,” but the term technology has a more specific meaning. All pink sheet stocks trade over the counter through dealer networks. But not all OTC-traded stocks are listed by OTC Markets Group.
Companies that adopt a certain set of regulatory and reporting standards are listed by the Over the Counter Bulletin Board (OTCBB) system, while companies that adhere to a stricter set of standards can list through the OTCQX. While stocks that trade over the counter are broadly referred to as “pink sheets,” the risk profiles of these stocks can vary widely.
Should you invest in pink sheet stocks?
Are there legitimate pink sheet stocks? Sure. Some companies simply aren’t big enough or find it impractical to list on the NYSE or the Nasdaq. But, with the notable exception of major foreign companies for which there is substantial information available elsewhere, it’s generally a good idea to avoid investing in any public company that lacks financial disclosure requirements.