Pink Sheet Stocks Explained
Pink sheet stocks are risky business; here’s what you need to know before you dive in.
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How many certainties are there in life?
I’m sure you’ve heard of Benjamin Franklin’s famous “death and taxes.”
When it comes to investing, taxes are always the center of attention, and it feels like a good time to switch to the other constant. So, let’s talk about death. ☠️
Where do stocks go when they die? Or more specifically, what happens to a stock after it is delisted? Delisting is a real possibility that happens more often than you may think. You may even remember the short and volatile life span of the Luckin Coffee stock from the summer of 2020 when a huge Chinese coffee company was delisted.
Well, to answer the question, one place these seemingly dead companies may end up is on the over-the-counter market. This is also known as pink sheet stocks. We’ll discuss what these stocks are, the risks associated with trading them, and how you can enter the world of investing in pink sheet assets.
Ready? Let’s go! 🚀
- What are Pink Sheet Stocks
- How Pink Sheet Stocks Work
- Pink Sheet Regulation
- Who Sells Pink Sheet Stocks?
- Popular Pink Sheet Stocks
- Buying Pink Sheet Stocks
- Tiers of OTC Stocks
- Pink Sheet Stocks vs. OTCBB
- Advantages of Pink Sheet Stocks
- Downsides of Pink Sheet Stocks
What are Pink Sheet Stocks 🔎
Pink Sheet stocks, or Over-the-Counter stocks, are securities and assets that are not listed on large market exchanges like the NYSE or the NASDAQ. Pink sheets stocks take their name from the color of the paper that the listings used to be printed on.
Pink Sheets are mainly penny stocks (stocks under $5 per share), but there are also large, reputable companies that trade on the pink sheet market. The top penny stock brokers may allow you to purchase delisted assets, but not all of them will—the reason these stocks are not on the exchange is because they do not meet the exchange’s requirements.
Some of these requirements include filing financial paperwork with the Securities and Exchange Commission (SEC), paying listing fees to an exchange, or having a share price over $1. Some businesses are too small to pay the fees associated with listing. Some large companies located outside the US are pink sheet stocks because they want to avoid burdensome SEC filing processes.
There are high-quality pink sheet stocks in circulation, but there are also less than reputable companies out there—and even downright terrible ones. Unfortunately, the pink sheet market has less oversight, which makes it easier for scammers to create fake companies as well.
Some scams have involved unscrupulous individuals creating shell corporations which are worthless, and then selling shares to pink stock investors. The SEC recommends investigating individual companies before investing in them, and anyone with a plan to not lose money should listen to this advice.
How Pink Sheet Stocks Work 🏗
While some large corporations are listed as pink sheet stocks, the most common way that companies will become over the counter assets is when an existing company falls below a certain price per share threshold. For the NASDAQ and NYSE, this threshold is $1.
Companies that have reached such low share prices may have real financial issues. They may have even tried to avoid this threshold by performing reverse splits on their stocks.That’s why many pink sheet stocks are near insolvency—investors need to be aware that corporations on the pink sheet market are inherently risky.
There may be other reasons that these stocks are not traded on the market, for example, the company may not want to disclose financial information to stock brokers and investors. This makes it more difficult for traders to verify whatever reports a company distributes.
Whatever the reason was that companies ended up on the pink sheets list, the majority of them are penny stocks. These kinds of trades are classified as speculative investments according to the SEC, which means “The SEC does not pass upon the merits or give its approval to any securities offered.”
Pink sheet stocks may be bought and sold through your broker, and facilitated by the private company OTC Markets Group. Their quotation systems include OTCQX, OTCQB, and Pink inter-dealer. With all investment decisions, you will want to stick to the trading fundamentals, do your own research and screen stocks to match your investing strategy.
Pros
- Investors can purchase very cheap stocks (often $5 or less)
- Allows investors to buy foreign companies they may be interested in.
- Return on Investment can be better with pink sheet stocks because they can rally quickly.
- Easier to find undervalued stocks because they are not normally watched by analysts.
Cons
- Volume on the pink sheet market is low; liquidity is poor.
- The bid-ask spread is often large, leading to increased volatility.
- No filing requirements for companies.
- Riskier investments.
- Less protections for investors.
Pink Sheet Regulation 👩⚖️
Pink sheet stocks are riskier, more volatile, and less liquid than assets on normal exchanges. On top of all that Pink Sheet stocks are only lightly regulated.
Much of the regulation on pink sheet stocks comes from education by the SEC. The resources produced by the SEC focus on the risks associated with microcap stocks and researching companies for potential red flags.
Who Sells Pink Sheet Stocks? 💼
Many different companies sell pink sheet stocks. On the less quality side there have been fraudulent shell corporations where the underlying asset is worthless, but the range extends to large cap, global companies like Bayer and Nintendo.
Pink Sheets offer a lot more flexibility for companies who cannot (or do not want to) meet the requirements to register with the SEC. Sometimes, smaller businesses do not have the overhead to complete the financial paperwork.
There are a few other reasons why companies sell pink sheet stocks.
- The company does not want to file with another regulatory body if they are a non-US business.
- The company does not meet the minimum stock price or market capitalization requirements.
- The company is nearing insolvency.
- The company does not want to release financial information to investors and stock brokers.
Popular Pink Sheet Stocks ✅
Even though pink sheet stocks are risky, and some of them are illegitimate, there are real companies in the space. Some of these corporations include Nintendo, Bayer, Nestle, and Volkswagen.
Often, large, non-US based businesses will opt to be traded as over-the-counter assets because it reduces administrative burdens for the company. It can be resource intensive to file with multiple government regulators.
Buying Pink Sheet Stocks 💸
While some of the top stock brokers may allow you to buy and sell pink sheet stocks, you can also trade through other broker-dealer networks. The trader for pink sheet stocks is OTC Markets Group. Depending on the size of the corporation, and the level of reporting that a company has done, you will be able to purchase the stock through one of the OTC Bulletin Board’s tiered listings.
Tiers of OTC Stocks 🗂
Because it is difficult for investors to understand the level of risk they are dealing with when it comes to OTC trading, the OTC markets group has created different tiers. The tiers help determine the level of reliable information available from a company.
It’s important to understand that tiers do not totally negate risk, but they can help reduce it. Some companies are even able to switch exchanges entirely depending on their history.
Current Information/Pink Tier
The current information tier is composed of companies that have submitted two annual reports and at least one quarterly report to OTC Markets. These companies must submit their most recent reports and an attorney letter that discloses all relevant information. Picking companies with more information available helps investors avoid fraudulent, worthless assets.
Limited Information Tier
The limited information tier is for companies that have some financial information available, but not the complete package because of financial troubles such as economic distress or bankruptcy. These companies must provide information within the past six months to qualify for the limited information tier.
No Information Tier ⚠️
The No Information tier is composed of companies that have gone dark. While they may provide information to the OTC group or a regulatory body, they have not done so. This is the riskiest investment for traders and the limited information has cost investors millions of dollars.
The companies may also have been involved in questionable business practices or management activities that had them removed from a market. These companies can later be moved to a higher tier if they provide additional information to regulators.
Pink Sheet Stocks vs. OTCBB ⚖️
The two main mechanisms for investors to acquire unlisted shares are through the pink sheets listings and the Over-the-Counter Bulletin Board. The OTCBB is operated by NASDAQ, and the two systems have unique advantages and drawbacks.
While Pink Sheets often deals in smaller cap stocks—sometimes described as nanocap companies—the OTCBB works with slightly larger companies. The OTCBB is also likely to have some of the larger multi-national companies like Nintendo and Volkswagen.
Pink Sheets vs. OTCBB
| Pink Sheets | OTCBB |
|---|---|
| Smaller cap stocks | Larger cap companies compared to pink sheets |
| Not required to file with SEC | Updated financial reports on file with regulators |
| Often penny stocks (under $5 per share) | May contain bonds and derivatives |
Advantages of Pink Sheet Stocks 💡
One of the biggest advantages of pink sheets stocks is that you maximize your return on investment if you find a good company. If you are able to find a penny stock that is trading well below its value, and that stock rallies to even a modest price, you will likely make many times your cost basis in returns. Gains like this seem to be common these days, with traders rallying behind speculative industries.
This is due to the low cost of entry for pink sheets stocks. You are even more likely to find value companies when analyzing the pink sheets market because institutional analysts are not observing these assets like they do for the NYSE or NASDAQ.
This can work in your favor because it may take a long time for pink sheets markets to adjust to the fair value of an asset. When you are trading on large exchanges such as the NYSE, stocks will quickly adapt to changes in real time. This may not be the case with pink sheet stocks.
Another great upside of pink sheets stocks is it will let you purchase stocks that may not have been available in your country. Corporations such as Tencent or Bayer may not be registered with the SEC, but that doesn’t stop you from purchasing shares.
Downsides of Pink Sheet Stocks 📉
Most of the risks associated with Pink Sheet Stocks have to deal with the lack of information and the need for individual investors to verify information. Some companies who have become delisted from the stock exchange may have been removed for non-financial reasons, such as questionable business practices and management decisions.
This could be related to not honestly disclosing financial records or it could mean that information was withheld from investors–leading to individuals making misinformed decisions. Investors may be able to avoid some of these bad assets by researching individual companies and seeing if they had any violations on file with the SEC. If they did, you can save yourself some money by steering clear of them.
Another major downside to pink sheet stocks is that the companies have low volatility. There isn’t always a lot of activity on all companies on the pink sheets listings. This makes it difficult for investors to enter and exit trades.
Pink Sheet stocks can have major downsides. You may not have all the information on a company you need to make an informed investment. Alternatively, you may have plenty of information, but you will later find out that the information was falsified in some way.
There are plenty of risks in the Pink Sheet stock market, but you can find great, undervalued companies that will improve your portfolios performance. Pink Sheet stocks can be a critical mechanism for growth for that right investor that does their stock research. Look in the right places, do plenty of research, and make meaningful gains.
Pink Sheet Stocks: FAQs
-
Do Pink Sheet Stocks Pay Dividends?
Yes. Many pink sheet stocks pay dividends. However, if a business is on the verge of insolvency, they will likely cut their dividend. If you purchase pink sheet stock of a large, major foreign corporation like Volkswagen, the dividend will most likely be stable as this is a German blue chip company.
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How Do I Buy Pink Sheet Stocks?
Investors can buy pink sheet stocks through OTC investment quotation services. Some brokers allow more experienced investors to purchase these assets on their normal trading platforms.
-
Do You Lose Your Money if a Stock is Delisted?
While you will still own your shares of a company once it is delisted, the delisting may significantly impact the value of those shares. Many delisted companies trade at less than $5. Investors may need to find an alternate brokerage to trade delisted assets.
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What Does Pink Mean in Stocks?
Pink sheet stocks are assets that have been delisted and are trading over-the-counter. Pink sheet stocks are less regulated than stocks on major exchanges.
-
What Happens When a Stock Goes Below $1?
When a stock’s price falls below $1 on the NYSE of NASDAQ, the stock is automatically delisted. Delisted stocks can still be traded through pink sheets or over-the-counter services.
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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
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