What are pink sheets, how are they used and how do they work?

“Pink sheets” refers to stocks that are trading
in the over the counter (OTC) markets. Over the counter markets are notorious
for small cap stocks. Pink sheets and penny stocks go hand in hand, and the
name pink sheets often refers to penny stocks.

The name originated simply enough, since they
were originally printed on pink paper, and had a suffix of .PK. Pink sheet
companies are often frowned upon due to there being a number of hidden secrets
etc.

What are
Pink Sheets?

Pink sheets LLC is a private company based in New
York, they are unlike any other exchange. Companies that do not require
regulatory filing tend to be registered on pink sheets. A company may also
choose to be listed as pink sheets should they not want to disclose
financial information. They provide real time quotations for stocks in the
OTCBB (Over-the -counter bulletin board.

Quotes on pinks sheets are displayed on a daily
basis. They are made by the National Quotation Bureau, and also provide the bid
and ask prices.

As opposed to companies that are listen on
regular stock exchanges, pink sheet companies are not subject to a great deal
of critical observation, for example, there are no minimum standards that must be
met to file with the Securities and Exchange Commission (SEC) in the pink
sheets.

Pink
Sheets trading time and companies

As previously mentioned, there are not a great
deal of regulations that have to be met by companies that want to be listen on
the Pink sheet, allowing them to do so easily. However, individual investors
cannot trade directly, the must go via a registered broker that meet the
standards of the Financial
Industry Regulatory Authority (FINRA). Pink sheets trade between the
regular hours (930am and 4pm EST), with the companies that are registered on
them having the same holidays as other large exchanges.

Financial
Requirements for Pink Sheet Companies

The requirement for a company to become registered
on the pink sheet is to file Form 211. Anything that is filed is required to be
in accordance with the Generally Accepted Accounting Principles.

Companies must have a lowest bid price of $0.25,
and at least 50 shareholders. The tiers of pink sheet listing vary, with the
number of requirements increasing alongside the tier.

Pink sheet
trading risks

Stocks on the pink sheets lack the availability of liquid assets and often
suffer from not being heavily traded, meaning volatility.

Bid asking prices are extremely varied, and a lot of the
companies are worthless. Another major risk is the fact that scammers can take
advantage of pink sheets since they are a quotation service, not an exchange.

A lot of the stocks lack basic information

Whilst pink sheet trading offers the incentive to make large returns within a short timeframe, they come with considerable risks. Investors should be wary, find out more information and use it when considering every investment. If one decides to trade, they should be sure to work by good investment guidelines and make use of limit orders when possible to decrease the risks.

Image Credits: pink sheets from Gajus /Shutterstock