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 for stocks in companies that cannot meet the requirements for listing on a major U.S. stock exchange like the New York Stock Exchange (NYSE). Some companies choose to sell their shares through the over-the-counter network to avoid the greater costs and regulatory requirements for listing on an exchange.
Most pink sheet listings are low-price, meaning that they trade for less than $5 per share. Pink Sheets is also a private company that works with broker-dealers to market the shares of OTC equities they represent. As Investopedia states trading in pink sheet securities is generally seen as highly speculative.
Understanding Pink Sheets
Historically, pink sheets got their name from the color of the paper on which quotes of share prices were published. Today’s trades are, of course, electronic, but the name lives on as a reference to OTC stocks.
Over-the-counter (OTC) refers to the process of trading for the securities of unlisted companies. The shares trade via a broker-dealer network rather than on a centralized stock exchange.
Pink sheets are OTC but they are not OTCBB. That is:
- The 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).
- Shares trading on the pink sheet platform have a “PK” suffix and are under no requirements from the SEC to file financial information. For this reason, they are seen as high-risk investments.
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. These small firms sell their stock at a relatively low price, making it easy for any investor to afford a stake in the action and possibly make significant returns.
Because they do not charge the high listing fees of the large exchanges, pink sheet transaction costs are usually lower.
Pink sheets are prone to fraud and price manipulation due to the lack of financial information required to list. A listing could end up being a shell company without an active business or assets.
The shares trade thinly and infrequently, making it hard to buy or sell when the investor wants. Less regulation leads to less available public information.