Pink Sheets - Explained
What is a Pink Sheet?
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Table of ContentsWhat are Pink Sheets?How Do Pink Sheets Work?OTCBB vs. the Pink SheetsOTCBB ListingsPink Sheet ListingsSEC Regulation of Penny StocksPros and Cons of the Pink SheetsReal World Examples of Pink Sheet Securities
What are Pink Sheets?
Pink sheets are a listing service for stocks that trade through over-the-counter (OTC) transactions. Pink sheet listings are companies that are not listed on a major exchange such as Nasdaq or the New York Stock Exchange. Stocks that are listed on the pink sheet are always small penny stocks that trade below five dollars per share. Pink sheet is also a company which works with broker-dealers to sell the shares of OTC equities they represent. Its speculative trading in pink sheet securities.
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How Do Pink Sheets Work?
Based on history, the pink sheets derive their name from the color of paper on which share price quotes were published. Today, the trades are not paper quotes but electronic ones. However, the name still calls OTC stocks, pink sheet listings. Not every company lists on the primary stock exchanges for various reasons. Over-the-counter (OTC) is the process of how unlisted companies securities trade. These investments trade through a broker-dealer network as against a centralized exchange such as NYSE and Nasdaq. Pink sheet securities trade on the OTCBB also referred to as the Over-the-Counter Bulletin Board. The OTCBB refers to an electronic system which shows over-the-counter securities with volume information and real-time quotes. Shares listed on the OTCBB have an OB suffix and its mandatory they file financial statements with the Securities and Exchange Commission (SEC). Shares trading on the pink sheet platform carry a PK suffix and no criteria from the Securities and Exchange Commission to file financial details, and for this reason, are termed higher-risk securities.
OTCBB vs. the Pink Sheets
Two primary platforms exist for listing over-the-counter securities. OTCBB is the first while the second is the pink sheets platform. Nasdaq operates the Over-the-Counter Bulletin Board (OTCBB) that acts as a quotation service for OTC sales. Shares are segmented between the OTCQB and OTCQX platforms. Pink Sheets refers to a private listing company for OTC securities.
There are limited restrictions to enter OTC markets. OTC-Link doesnt place restrictions on securities which might be listed, and OTCBB only needs updated financial reports to be filed accurately with the banking regulators, insurance regulators, or the SEC. These markets provide brokers, as well as, dealers with a mechanism for listing their current bidding, as well as, asking prices to finalize transactions. OTC stocks are usually termed securities which are too little in size to be listed on a bigger exchange and those that have moved from traditional exchanges. Also, these shares might not satisfy the requirements for joining the exchange. Further, many companies find the $500,000 NYSE listing cost up to $75,000 for a Nasdaq listing as a financial barrier. Thus, OTC listings can comprise companies of all sizes. Large international companies like Bayer A.G. and Nestle SA trade through the OTC platform. Bonds, as well as, derivatives are also listed on the OTC marketplaces. A penny stock is the stock of a small company trading for less than $5 per share. Despite the fact that certain stocks trade on big exchanges like the NYSE, the majority of the penny stocks trade via OTC through the OTC Bulletin Board (OTCBB) or pink sheet listings.
Pink Sheet Listings
Pink sheet listings usually comprise smaller stocks referred to as penny stocks. These companies don't have to file the needed documentation with the Securities and Exchange Commission. Listing on the Pink Sheets requires a business to file Form 211, which includes certain financial information, with the OTC Compliance Unit. Companies aren't mandated to make their financial situations known to investors or even broker-dealers responsible for marketing their products. These companies are smaller than the ones that list on the OTCBB. Pink sheet penny stocks can trade rarely due to a lack of liquidity. Due to low liquidity, investors may find it difficult to get an accurate price and might encounter difficulty buying or selling when they want to enter a position. Because of their lack of liquidity, brokers charge wide price quotes or bid-ask spreads, between the sell-side and buy-side. Generally, penny stocks are considered highly speculative which means that investors can lose substantial amounts or their whole investment. In these situations, investors might not have enough information required for making sound investment decisions, furthermore, the financial situation of the company may not be stable. Some penny stocks with the inclusion of pink sheets can be fraudulent shell companies or even companies that are almost insolvent.
SEC Regulation of Penny Stocks
As a result of their highly speculative nature, there are various SEC restrictions, requirements, and regulations governing the way brokers trade penny stocks. Most of the requirements center on consumer protection, as well as, education. Penny stocks are often more risk than regular stocks. Usually, stocks wind up on the pink sheets because they fail to satisfy SEC requirements for listing on bigger stock exchanges, like their stock price dropping below $1 or lacking financial information.
Pros and Cons of the Pink Sheets
Pink sheet listings offer various small companies the opportunity of raising capital via selling shares to the public. These small firms sell their stock at a low price thereby making it easy for all investors to afford a stake of the action and maybe make huge returns. Because they dont charge the high listing fees which the large exchanges charge, the pink sheet transaction costs are always lower. Pink sheet stock is liable to fraud, as well as, price manipulation as a result of the lack of financial information needed to list. Many companies can end up as shell companies without active business or even assets. These shares trade infrequently and thinly, making it difficult to purchase or sell when the investor wants. Less regulation brings about less available public information, the opportunity of outdated information, and also the likelihood of fraud.
Pros Pink sheet listing grants small companies access to capital funding via public stock sales. Low share prices can allow for expansive share appreciation provided the company thrives. Trade transaction costs are less in that companies dont pay exorbitant exchange listing fees.
Cons Fewer requirements and regulations can result in incorrect or outdated information given to the investor. Pink sheet stocks trade thinly which makes it difficult for an investor to buy or even sell shares. Pink sheet listing is liable to fraud and shell companies listing.
Real World Examples of Pink Sheet Securities
OTC Markets Group operates the OTCQX financial markets via otcmarkets.com and lists the companies that are the most actively traded. On a certain day, the total dollar volume can surpass $1.2 billion having over 6 billion shares trading hands. Companies listed through pink sheets include: The Chinese multimedia company is known as Tencent Holdings LTD (TCEHY). The food and beverage giant is known as Nestle SA (NSRGY). A health care company is known as Bayer A.G. (BAYRY). Large companies like Tencent Holdings have a higher trading volume as against smaller companies making the bigger companies easier to trade and more liquid. For instance, on the 22nd of March, 2019, Tencent Holdings has 4.2 million share traded while a small pink sheet company by the name Pacific Software(PFSF) traded just 200 shares for the same day, with 20 cents as its daily price range.