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What are Pink Sheet/OTC Stocks?
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What are Pink Sheet/OTC Stocks?
While most public companies are traded publicly on the major stock exchanges, like the American Stock Exchange (AMEX), or the New York Stock Exchange (NYSE), or the NASDAQ, pink sheet or OTC (over the counter) stocks do not meet the listing requirements for being listed on these exchanges. These are traded over the counter via an electronic quotation system that is hosted by a company known as the OTC Markets Group. The terms ‘pink sheet stocks’ and ‘OTC stocks’ are interchangeable and refer to the same thing. The OTC Markets Group was founded in 1913 as the National Quotation Bureau. At that time, it was a private corporation that published stock quotes in newspapers on yellow or pink sheets. The term pink sheet stocks stuck and investors still use that term to refer to these types of stocks.
Trading Pink Sheet Stocks or OTC Stocks
Although the OTC Markets Group is not a stock exchange, the company works to provide reliable pricing information while linking sellers and buyers to brokers that will execute orders for these stocks on their clients’ behalf. Investors need to be aware that some brokers or brokerage firms tend to place a limit on the purchase of pink sheet stocks, or these firms may charge a higher commission rate in order to initiate pink sheet stock trades. And with some pink sheet companies, there may not be a sufficient stock volume offered for the investor who is looking to invest a large sum of cash.
Risks Involved with Pink Sheet Stocks
When looking at pink sheet stocks, it is important to know the reason that the stock was unlisted or delisted in the first place. Sometimes this is due to a recent bankruptcy, serious insolvency, small market capitalization, or thin volume. Since most over the counter companies do not file an annual report with the SEC (Securities and Exchange Commission), then they do not offer any independently audited financial reports for investors to look over. Because of this, it can be difficult or even impossible to find unbiased or reliable information about the pink sheet company’s finances.
Penny Stocks and Pink Sheet Stocks
Although penny stocks are not necessarily pink sheet stock, a trader may use the over the counter stocks that are listed at less than two dollars a share in order to make a speculative bet on the future of a particular company. In fact, some speculators will trade penny stocks that have the possibility of a one-hundred percent increase or more in the stock price. A dishonest speculator might even pump up the pink sheet stock price illegally via rumors in an attempt to dump the stock after buyer increase the stock’s price. This is known as a pump and dump, which is a scheme that can cost investors a lot of money.
Benefits of Purchasing Stock over the Counter
There are obviously some benefits to be reaped, however, when purchasing stocks over the counter. Many large companies from overseas are not listed on the major U.S. stock exchanges but they can offer investors quite a lucrative return on their investments. Roche, Air France, Adidas, and Deutsche Telekom each are companies that produce billions in revenue each year – and all of them are traded over the counter as pink sheet stock. Foreign pink sheet stock typically offers greater volume and also pays out dividends to stock holders.
Talk to your financial planner about pink sheet stocks or over the counter (OTC) stocks to find out if this type of investment is a smart one for you to consider, based on your own personal preferences and your tolerance of risk.
Related Articles: Best brokerage for pink sheets and OTC stocks
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