Ever wondered what pink sheet stocks are? The Pink Sheets, a publication created by a company called Pink Sheets LLC, was dedicated to quoting small-capitalized domestic and foreign stocks that did not meet the listing requirements of stock exchanges.
Originally established in 1913 as the National Quotation Bureau, the company now publishes quotes online for the over-the-counter (OTC) securities market under the name OTC Markets Group.
This firm currently provides liquidity and price information for more than 10,000 OTC stocks listed in 3 different markets known as OTCQB, OTCQX and Pink, using an inter-dealer quotation system called OTC Link.
What are Pink Sheet Stocks?
The phrase pink sheet stocks refers to equities listed on OTC Markets Group’s OTCQB, OTCQX and Pink inter-dealer quotation systems. These stocks trade in the OTC market and many of them do not meet the listing requirements of major U.S. stock exchanges.
Penny stocks are considered speculative investments by the SEC, but they can trade on securities exchanges — including foreign securities exchanges — if they meet the stock exchange’s listing requirements.
The OTC-Link markets are divided into 3 different tiers with their own requirements. OTCQB stocks are only subject to the SEC reporting standards for listing, while the OTCQX stocks go through a qualitative review by the OTC Markets Group and include both transnational and domestic companies.
Both the OTCQB and OTCQX stock issuers are subject to the reporting requirements of the Securities and Exchange Act of 1934.
In contrast, stocks in the Pink market, which include many foreign stocks, have no financial standards or reporting requirements and do not need to be registered with the SEC. The companies in this tier are further classified by the timeliness of their reporting to investors and have limited or no public disclosure of their financials.
The Pink market is generally the riskiest to trade of the 3.
Pros and Cons
The pink sheet markets have their benefits and drawbacks.
Many small growth companies’ stock begins trading on the OTC-Link markets. Some of these companies go on to later get listed on a major exchange after they have expanded and grown to the point of being worthy of a higher stock price.
One example is Concur Technologies, which traded as low as $0.31 per share in 2001, but currently trades over $125 per share.
You’ll eventually find undervalued stocks that should be trading for much higher prices if you have the patience to research and analyze pink sheet-listed companies.
For example, you might discover companies that have been through rough times and have seen their stock price fall below $5 per share despite the fact that they are sitting on net assets worth more than the company’s stock valuation.
Return on investment (ROI) is the percentage return you could see on a stock you purchased. For example, if you invested $1,000 for 10,000 shares at $0.10, you would have an investment worth $10,000,000 if the stock rallied to $10 per share.
While this ROI may seem unrealistic, such returns occur more often than you would expect with pink sheet stocks. Returns of this magnitude are rarely seen in other markets.
Penny stock investors should be prepared for the possibility that you may lose your whole investment (or an amount in excess of your investment if they purchased penny stocks on margin).
Pink sheet stocks are among the riskiest speculative investments around, so make sure you know what you’re buying when you decide to invest and only use risk capital you can afford to lose.
Lack of Liquidity
Since the pink sheets contain stocks of companies of questionable profitability that often provide only a limited supply of stock, you may find that some pink sheet stocks lack liquidity.
The problem with low liquidity is that you could move the market significantly with a large order, or you may have trouble liquidating a long position if all the bids disappear once you start selling.
A lack of liquidity usually means increased volatility. Pink sheet stocks can be extremely volatile depending on the market and the amount of stock the company has outstanding.
High volatility combined with low liquidity could make it a nightmare to manage a substantial pink stock position using traditional methods.
The illiquid nature of pink sheet stocks and the lack of oversight for the majority of companies listed on the OTC-Link markets make it a prime location for scammers and “pump and dump” schemes.
When making any OTC-Link market transaction, you might want to double-check the recent price history and your research before committing any money to what seems to be the penny stock trade of the day.
How to Buy Pink Sheet Stocks
Pink sheet stocks present different challenges than trading normally listed stocks, so follow these steps carefully to learn how to buy them.
Step 1: Research the Market
When you start trading any market, you should do your research and have a good idea of what you’ll be trading, so pink sheet stocks are no exception. You can first look over the OTC Markets website to get a feel for the type of businesses that have their stocks trading on the different OTC-Link markets.
That website also features market activity, news, corporate services, a link to its Alternative Trading Services platform and an extensive learning section to help you get familiar with both the market and issuing sides of the OTC stock business.
Another important feature on the OTC Markets website is its stock screener page.
This screener page lets you search more than 10,000 listed stocks by market, security type, country and industry. You can also input growth parameters for stocks, such as minimum and maximum price and percent price change over times frames, including a day, 5 days, a month, 13 weeks and a year.
Market hours during which you can trade pink sheet stocks run from 6 a.m. until 5 p.m. EST.
Step 2: Make a Plan
Once you get an idea and feel for the pink sheet stock market, you can then proceed to work out a trading or investment plan. Remember, you’ll be involved in one of the most speculative stock markets in the world.
You should plan on using limit orders and stop-loss orders to manage your risk, though keep in mind that the volatility and lack of liquidity in these markets can turn normal risk management practices into quite a challenge.
Trading in any market without a plan is like navigating a ship without a compass, so you’ll need to structure your trading activities or you’ll probably succumb to your emotions. Emotions can really make trading difficult since most people don’t know how to stay on an even keel when making and losing money, although the “losing money” part tends to cause the most problems.
If you trade without a plan, you’re basically just gambling. Trading involves researching the market to find the trades with the highest likelihood of turning a profit. You will most likely lose money if you begin by buying and selling penny stocks without a plan, just like most casual gamblers do at casinos.
Step 3: Pick a Broker
After you have developed a structured approach to trading pink sheet stocks, preferably with sound money and risk management components, you can then start looking for the best online broker for your needs so you can start trading your plan.
A competent broker can make a big difference in your overall trading results. Remember, how you trade stocks is just as important as where you trade, so make sure you pick the right broker. Some of our top choices for trading pink sheet stocks appear below.
One of the best overall brokers for trading pink sheet stocks is Interactive Brokers.
Interactive Brokers offers commissions as low as $0.0005 per share with a $1 minimum and a maximum of 0.5% of the value of the trade.
In addition, Interactive Brokers’ Trader Workstation (TWS) trading platform facilitates trading in any major market.
It has many features experienced traders can appreciate.
Interactive Brokers can also give you some of the lowest margin rates in the business.
They also have excellent customer service and research resources.
In addition, you have a choice of several web-based or desktop trading platforms, as well as a mobile option for Android and iOS.
E*TRADE has a great trading platform that caters to both experienced and new traders.
While the $6.95 per trade commission may seem high, E*TRADE makes up for it in services. Beginning traders can find a wealth of educational resources, while frequent traders can get a discounted $4.95 per trade rate.
E*TRADE lets you choose your account type and offers “pre-built” and managed portfolios as well as the E*TRADE Bank and stock plans.
One of the reasons E-Trade made our list is the ease of use of its platform and intuitive interface. Other perks at E*TRADE include over 250 commission-free ETFs and 4,400 no-transaction-fee mutual funds.
TD Ameritrade offers trading in pink sheet stocks, and you can open an account for free, but if you want to open a margin account, you’ll need to deposit a minimum of $2,000.
The broker’s 3 platforms include a web-based platform, a mobile option and the thinkorswim platform for options.
In addition to stocks, you can trade options, ETFs, mutual funds, futures, forex, bonds, cryptocurrencies and annuities. If you qualify, you can also participate in stock initial public offerings.
TD Ameritrade commissions for stock trades are $6.95 for trades made online.
The cost is $35.99 for Interactive Voice Response (IVR) orders and if you have a broker assist you with the trade, the cost is $44.99.
Step 4: Test your Plan and Start Trading
The next step is testing your trading plan. Ideally, you should find a broker that offers a demo account so you can get an idea of how the market trades and evaluate your trading plan. Testing a successful plan gives you confidence, which is a key ingredient of a successful trading mindset.
Once you’re satisfied that your trading plan is profitable, you can proceed to fund a trading account and start trading. Pink sheet stocks can be extremely volatile, so be careful to avoid overtrading to keep from paying extra commission costs.
Are Pink Sheet Stocks for You?
Pink sheet stocks can be cheap and can move up in the blink of an eye or they can evaporate and lose the little value they had when you bought them.
Very few financial markets have as much risk or can match the returns that you can get from trading pink sheet stocks. If you have a lot of patience and a strong stomach for risk and you know how to research companies to find value where others might have missed it, then trading this type of stock might be for you.