Pink Sheets

Pink sheets are stocks that cannot trade on exchanges like NYSE/NASDAQ, for which there might be multiple reasons – they don't have enough capital to go public, or it does not make sense for them to go public over a small capital they intend to raise, or they took a strategic decision not to go public because of the scrutiny regulatory boards bring into them.

The debate regarding their authenticity has been around the market for a long time. Their effect on the market and the economy, on the whole, has been contemplated by investors, analysts, and experts alike. The high-risk point is due to the more than-normal volatility of these pink sheets penny stocks.

• Pink sheets are stocks not traded on major exchanges such as NYSE/NASDAQ due to insufficient capital or the company's decision not to go public to avoid regulatory scrutiny.
• Pink sheet stocks do not have a minimum revenue, profits, or business size requirement.
• While pink sheets are not considered traditional investments, they offer a straightforward way for companies to raise capital and take the first step toward becoming a public company. 
• Many companies raise capital through pink sheets before moving to an official exchange listing.

Pink sheets are a list of companies whose stocks are traded over the counter (OTC) in the United States of America rather than being traded in the open market or the stock market.

These pink sheets stocks work on the same or similar principles as that of generic stocks. The core idea is that demand meets supply and prices alter themselves accordingly. The stock begins trading at a certain price, and low demand or high supply moves the prices downward in small ticks (ticks are the minimum amount a stock price can move). High demand and low supply push the prices in an upward direction. A transaction happens when the asking price is equal to the bid price. However, there are a few main differences between regulated stocks and pink sheets.

• They are unregulated and do not cover the government's guarantee or the audits for IPO-based trading companies.
• The market for pink sheet stocks is small compared to that of the IPO-based stock market.
• The transaction charges are pretty high compared to stock markets, especially because the demand and supply match is low and operational costs are high.
• There are no financial standards to be followed, and the company does not have to disclose anything. Any disclosure remains an intended detail the owner puts out.
• In general, delinquent, distressed, and bankrupt companies are the companies that are traded in pink sheets.

There is no debate that pink sheets are not regular investments. The debate is around whether they are to be allowed, and the recent Sarbanes Oxley Act of 2002 made it more difficult for companies to raise capital via this method. However, it remains one of the easiest ways for companies to raise capital, and they are the first step for many companies to go public. Many companies raise money via pink sheets, get going and then get into an official listing.

Stocks of this nature usually include penny stocks that are more volatile than regular stocks. Let us understand the concept of pink sheets stocks with the help of a couple of examples.

Example #1

After watching a famous movie about investing in penny stocks and stocks that are traded over the counter, a group of friends decided to search for pink sheets penny stocks online hoping they could make big gains from these stocks in a short to medium-term time frame.

They collectively invested about $100,000 in 10 stocks. In the following weeks, a war between a major economy and its neighboring country caused a tumble in the conventional stock market and the ripple effect ripped off more than 50% of their investment.

Panicking from the situation, all of them pulled out their money and decided to limit their losses to $50,000.

Example #2

For those who have watched the 2013 film "Wolf of Wall Street," pink sheets will certainly not be a new term. Since the 1980s, pink sheets have changed how they are being traded and how they are being cost. The transaction charges have gone down quite significantly over the past 20 years. With the rise of the internet, companies like OTC Markets created a platform to trade penny stocks. Before such companies existed, people would have to call brokers to see if they wanted to invest in penny stocks.

OTCmarkets.com gives information about the stocks they trade. On their website, they call penny stocks penny stocks – which is a widely used term for them in the USA. And they quote that they trade about 10,000 stocks and about 60% of them are a penny. So, giving examples and wasting time on them would be pointless because a simple Google search can reveal hundreds of examples if not thousands.

source: OTCmarkets.com

So, instead of looking at them, let us look at a penny stock that explains how penny stocks can be useful. Tencent, a Chinese company, is one of the world's largest software companies, and it is valued at over 200 billion US dollars. But people who want to buy these stocks in the USA have no chance to do so. The Chinese regulations over foreign investments are pretty stringent. So, companies like OTC markets go ahead and sell unsponsored ADRs of Tencent in the USA. The code for Tencent is TCEHY (OTCmarkets.com).

ADRs are American depository receipts and are essentially a way to buy stocks of an international company. Sponsored ADRs are bank-bought ADRs that are formally traded, and since banks don't prefer to trade some companies, pink sheets provide a platform for them to raise more money if needed. And opening up to markets benefits more information flowing into the market.

Let us understand the advantages of investing in pink sheets stocks through the explanation below.

• These stocks provide an additional medium for trading. It increases the stocks' liquidity, and its actual price can be easily realized. And the more the mediums of trading, the higher the number of people who keep trading.
• For companies, pink sheets provide a ‘no minimum requirement’ for either revenues or profits or their business. Companies that are traded under this will not be audited as regular companies. The companies need not show concern or need not be in running condition for 3-4 years, which is mandatory for companies to go public.
• From a company's perspective raising money through pink sheets is an absolute delight in the freedom they go to IPO. There is no limit on the share price minimum or the number of shareholders. Fewer regulatory bodies also govern them, and they don’t even require annual shareholder meetings or a formal set of board members.
• From an investor’s perspective, they are volatile. They are available for less than one dollar, and the ticker rate is one cent. So even a movement of one cent in the stock price varies the profits by a good percentage. So, pink sheets might be a great option for those trying to trade instead of investing in the long term.

Despite the handful of advantages, there are the obvious factors that have been discussed throughout the article and beyond. Let us understand the other extreme- the disadvantages of investing in pink sheets penny stocks.

• The benefits for companies are all trouble for investors. Investing in non-regulated, non-open companies can be a considerable risk.
• A lesser amount of research will be available to invest in pink sheets.
• The SEC says that these stocks are a very risky investment.
• They are very volatile, almost as volatile as option prices are.
• Sellers would have to be able to sell their shares at a very low price in case of emergency liquidation.

This article has been a guide to Pink Sheets. Here we explain Pink Sheet stocks' examples, advantages, and disadvantages in detail. You can learn more about corporate finance from the following articles –

• Distressed Sale
• FAANG Stocks
• Blue Chip Stocks
• Value vs. Growth Stocks