Pink sheets are smaller stocks with a notorious reputation…
They got a lot of attention when the movie “The Wolf of Wall Street” came out. And just as the movie showed, they made penny stock promoters fortunes in past decades.
But can regular traders profit, too? First, you gotta know the ins and outs of this covert and shady asset class…
Read on to find out more about these penny stocks and their potential risks and rewards.
Table of Contents
What Are Pink Sheets?
Pink sheets are smaller stocks that aren’t traded on the big exchanges like the Nasdaq. They’re traded on the over-the-counter (OTC) markets. They tend to be less liquid with higher spreads.
Orders take longer to execute than their listed counterparts. These stocks can be tough to trade, but they’re the most volatile stocks in the market. And I love volatile stocks. Pink sheets can surge 100% or even 1,000% in a single day. That’s a lot of volatility!
Pink sheets are also cheaper than most other stocks in the market. Most of them trade for under $5 per share. That makes them more appealing for traders with small accounts. But they’re not necessarily better than listed stocks…
Most of them are penny stocks. These tiny companies have a bad rap for being marketed to unsuspecting investors. Ultimately, most of these companies will fail. But they can also offer plenty of opportunities to traders in the know…
The History of the Pink Sheets
So why are they called pink sheets? Back in the day, pink-sheet quotes were literally printed on pink pieces of paper. Now that trading is electronic, these stocks are handled by the OTC Markets Group. This company was formerly known as the Pink Sheets. Hence, the term and why it’s stuck around for so long.
And for the rest of this article, we’ll refer to all the markets listed with the OTC Markets Group as pink sheets.
Pink sheets are traded through a network of broker-dealers. These broker-dealers trade on behalf of their clients and themselves.
Promoters used to heavily market these stocks to unsuspecting clients. They’d tout crap penny stocks as the next Microsoft, with rapid potential to grow. Note that I said crap penny stocks. These companies struggle to survive. Some don’t even have products or a legit office.
Some used to be on the listed exchanges and fell out of favor with investors. Others are low on cash and on the brink of bankruptcy. Some are even bankrupt already. That’s noted by a ‘Q’ at the end of the ticker, like Sears (OTCPK: SHLDQ).
Pink sheets are notorious for pump-and-dump schemes, dilution, and market manipulation. Now, promoters aren’t around like they used to be. The Securities and Exchange Commission (SEC) cracked down hard — and with good reason. That was some sketchy business. But you can still trade penny stocks and pink sheets.
Why Companies List on the Pink Sheets
Some small companies prefer to be listed on the pink sheets more than the large exchanges. There are lower listing fees and lower requirements on this platform. Companies that fail to adhere to large exchange rules can get delisted to the pink sheets. That includes rules like keeping stock prices above $1 over a period of time.
Others are legitimate foreign companies that list on the pink sheets for exposure to U.S. markets. They choose the pink sheets to avoid filing with the SEC. These are companies like Nestle (OTCPK: NSRGY) and Adidas (OTCQX: ADDYY).
Foreign companies list as American depositary receipts (ADRs) to allow investors to purchase them with U.S. dollars. But they still must meet the requirements of their foreign exchange. The ‘Y’ at the end of their tickers indicates foreign companies.
So now you might be wondering … is there only one OTC market?
Nope, there are actually a few. Each tier holds different quality companies. Let’s take a look at some markets and requirements…
Pink Sheet Markets & Listing Requirements
OTCQX
This is the premium tier. The best-of-the-best pink sheets reside here. Companies don’t need to register or report to the SEC. Instead, they must report financial information to the OTC Markets Group. These companies must be operational. That means no shell companies, bankruptcies, or penny stocks allowed.
OTCQB
This is a lower-level tier. Companies must have an annual certification with the OTC Markets Group. They’re also required to keep up-to-date reporting on their finances. But it’s not as stringent as OTCQX.
OTCPK
These are branded as the Pink OTCs. These are the lowest tier of all the pink sheets. There are no standards or reporting required. This tier includes shell companies, bankruptcies, and true penny stocks. This is the Wild West of the pink sheets.
These companies don’t have to be transparent with their finances. They don’t need to provide periodic reports or information to the SEC. The reporting status for OTCPK stocks is noted on the OTC Markets Group website. This is listed as one of the following:
- ‘Stop’ icon: no information
- ‘Yield’ icon: limited information
- ‘Pink’ icon: current information
You can also find out whether a company is a shell company, penny stock exempt, and more by reviewing its quote on the OTC Markets Group site.
Remember, even when you think a company looks good from its quote, exercise caution. These stocks can turn on a dime. Tread carefully.
Gray Market
These securities aren’t publicly quoted on any of the OTC Markets or OTCBB. They aren’t traded much. And there’s no real reason for traders to explore this market. I’d avoid these securities. You can find better opportunities elsewhere.
Pink Sheets vs. OTCBB
The OTCBB (OTC Bulletin Board) used to be the most prominent OTC platform. It’s run by the Financial Industry Regulatory Authority (FINRA). OTCBB companies must be up to date with the SEC…
But they have less stringent requirements than major exchanges. There are no other reporting requirements.
In recent years, it’s shrunk to oblivion. That’s due to the OTC Markets Group platforms having an electronic platform for quotes. The OTCBB didn’t keep up. OTCBB stocks have either migrated to the OTC Market Groups platforms or are dual-listed under both platforms. For most traders, the OTCBB platform is obsolete.
How to Trade Pink Sheets Online
Not all brokers allow access to trade pink sheets. You’ll need to contact your broker to see what exchanges you can trade. With some brokers, you might have to request access to trade pink sheets. And trading them may mean more commissions and fees. They can be more expensive to trade too.
Definitely check in with your broker before you jump into these stocks.
Once you’re cleared, it’s as easy as placing an order with one of the bigger exchanges. But before you do, read the risks below first.
It’s easy to ignore these risks until you’ve personally experienced big losses from trading them. Do your due diligence before trading any stock, pink sheets especially.
We love focusing on all kinds of stocks at StocksToTrade Pro — especially the big exchanges like the Nasdaq or NYSE…
OTC stocks can move fast and be low priced. I love trading this kind of volatility. But I don’t necessarily recommend pink sheets for newbies … Some traders make these stocks work for their trading style. But they educate themselves and use resources like StocksToTrade.
StocksToTrade was specifically designed for trading penny stocks. You can scan and chart almost all the pink sheets on the market today. Start with a 14-day trial for just $7!
Risks of Trading Pink Sheets
Caveat Emptor
Buyer beware! You’ll see this symbolized as a skull and crossbones on the OTC Markets Group website. This means the company is known to be participating in fraudulent activity. It’s best to just stay away.
If a stock has the ‘honor’ of getting this label, it’s likely in for a massive selloff. That could be good if you’re shorting it.
Pump & Dumps
We don’t see this as much these days. But not so long ago, pump and dumps were a common scheme with pink sheets. Promoters bought shares and pumped up the stock price. They marketed the shares to unsuspecting investors through promotional mailers, emails, social media, or chat rooms.
Once the stock price went up, they’d sell all their shares and leave unscrupulous investors holding the bag. These schemes aren’t as popular as they were in previous years due to greater regulation. But they still occur. Definitely be wary of a stock that keeps going up slowly every day for a period of days or weeks. You definitely don’t wanna be around when it tanks.
Many penny stocks become diluted. That means the company issues new shares of the stock. This can devalue the worth of investors’ stock —they now own a smaller part of the company.
This is like a government issuing new currency. It devalues the currency already held and causes inflation. More shares on the market also make it more difficult for a stock to rally.
Liquidity
Pink sheets are usually illiquid — they’re tough to trade. Illiquid stocks tend to be choppy — they don’t move smoothly as we like at StocksToTrade Pro. The price jumps all over the place. Sometimes, these stocks tank out of nowhere.
In other words … they’re a mess. There are only a handful of pink sheets that become fairly liquid each day. Most traders only focus on the most liquid of those.
Spreads
Pink sheets have high spreads. This means that the buy and sell prices are fairly far away from each other. For instance … you can buy a penny stock for $1.10 but only get $1.00 to sell it. The market maker banks this difference in the spread as profit.
Slow Executions & Slippage
When trading pink sheets, you gotta give some leeway for slippage. Place your buy limit above the offer price to ensure you’ll get filled. Place it 5%–10% higher if it’s moving fast. Pink sheets take up to a few minutes to fill even if you’re quick. This is a big challenge.
But if a pink sheet starts panicking, it’s even more difficult to get out. Take that into account and be extra cautious. But that’s not all. You need to be aware of…
Price Manipulation
There aren’t as many traders as there are on the big exchanges. So market makers can see all retail traders’ orders. If you’ve set a stop-loss order, they can purposely drop the price to stop you out. But don’t take it personally … they just want your money.
So with all those downsides…
Should You Trade Pink Sheets?
Pink sheets are highly manipulated and can cost traders and investors a lot of money. These low-priced stocks can have large commission fees depending on your broker. They’re also prone to being illiquid and various market-manipulation schemes.
And depending on the stock, obtaining accurate info can be a challenge too.
Is it worth it? Some traders say yes. It really depends on your strategy and risk tolerance.
Honestly, they’re usually too illiquid for me. I usually stick with stocks on the big exchanges. But if the conditions are right … If a pink sheet gets a deal with a huge company like Apple … If there’s high liquidity and a breakout chart … the stock can really rally.
And that can be sweet for the traders who can ride the news momentum.
Conclusion
No doubt about it … pink sheets are a tough market to get a handle on.
This is the Wild West of stocks, but they’re not for gunslingers. Wanna trade these stocks? Go in with your eyes open. Be disciplined and know the risks.
And as much as I love the wild volatility, I love steady profits far more. That’s the idea behind the SteadyTrade podcast. It’s a place for traders to learn tips and discipline and work toward consistency. All while having some fun.
My mission is to be the best trading mentor to you. Come see how I trade every day. In StocksToTrade Pro you get webinars twice daily and plenty of resources to help you trade smarter. Join me and an amazing group of traders at StocksToTrade Pro now!
And keep a tab on the StocksToTrade blog and SteadyTrade podcast.
What’s your go-to exchange? Do you trade pink sheets? Leave a comment below!