Table of Contents
- 1 Share this Infographic!
- 2 How Do Pink Sheets Work?
- 3 How Are the Pink Sheets Different from a Stock Exchange?
- 4 Pink Sheets vs. OTCBB
- 5 Advantages and Disadvantages of Pink Sheets
- 6 The Pink Sheets Tier System
- 7 Key Profitable Secrets for Pink Sheets Trading
- 8 Why Companies List on the Pink Sheets
- 9 Are Pink Sheet Stocks Safe?
- 10 How to Learn About the Stock Market
- 11 Conclusion
Download the key points of this post as PDF.
Have you heard about pink sheet stocks? Do you know how they’re traded?
The pink sheets are a listing of over-the-counter stocks that work differently than those featured on a stock exchange. Many investors get a bit uneasy on the subject, as pink-sheet securities tend to be associated with small, unproven companies.
However, with the right knowledge and diligence, there can be great opportunity amidst the risk associated with pink sheet stocks. I’ll get into that in further detail later on.
For now, just know that I’ve made most of my wealth through pennystocking. For me, it’s been an amazing way to invest a little money, get a little profit, improve my techniques, and build a fortune over time.**
This isn’t investing. It’s trading. There’s a big difference. Instead of waiting months or years to collect your profits, you might, in theory, generate profits in as few as 10 minutes.
Let’s look at how pink sheets work, what they represent, and how to exploit them for profit at the lowest possible risk.
How Do Pink Sheets Work?
Every day, the OTC Markets Group distributes listings of smaller stocks — usually penny stocks, which are thinly traded and therefore not of interest to major investors — that include the bid and ask prices for each one.
You can identify pink sheet stocks by the .pk ending to the stocks’ ticker symbols.
These are stocks that are traded over-the-counter, which is why they’re often called OTC stocks. In other words, they aren’t traded on the major exchanges, such as the NYSE or the NASDAQ. Consequently, stocks on pink sheets aren’t subject to the financial disclosure rules necessary for larger stocks.
If you get the pink sheets, you can find companies whose stocks you might want to buy or short. Plug them into chart patterns using a service like StocksToTrade to help figure out where those stock prices might be heading.
What Are Pink Sheets and Their History?
There’s a bit of confusion about pink sheets and how they work. It largely comes from industry jargon.
Pink sheets got their name back in 1913, when they were originally printed on pink paper. Now, they’re digitized on the OTC Markets Group website. If you’re a non-professional (in other words, not a broker), you can subscribe to the pink sheets for between $5 and $15 per month.
The OTC Markets Group provides a ton of information outside of bid and ask prices for individual stocks. The company also has an extensive educational section.
How Are the Pink Sheets Different from a Stock Exchange?
Pink sheet stocks aren’t regulated like stocks traded on the major stock exchanges. They’re not listed on those exchanges, either.
Some pink sheet stocks issue financial documents such as profit-and-loss reports and balance sheets, but they’re not required to do so. You won’t find them on the trading floor. They’re not registered with or regulated by the Securities Exchange Commission (SEC). And there are no listing standards.
In fact, the only requirement imposed on pink sheet stocks is for the company to register Form 211 with the OTC Compliance Unit.
Pink Sheets vs. OTCBB
Many people mistakenly conflate the pink sheets with the Over-the-Counter Bulletin Board (OTCBB). They’re actually two radically different organizations. I prefer the OTCBB.
While the pink sheets are merely listings of bid and ask prices for low-price stocks, the OTCBB is a quotation service. It also happens to list OTC stocks. It’s owned and operated by Nasdaq, while the OTC Markets Group is a private company.
OTCBB stocks have to register with the SEC, and instead of ticker symbols ending with .pk, theirs end with .ob.
Advantages and Disadvantages of Pink Sheets
Let’s talk about penny stocks for a second …
Originally, penny stocks were so-named because they traded at less than $1 per share. Today, largely because of inflation, they describe any stock that trades at $5 per share or less.
Some pink sheet stocks aren’t penny stocks. Most of them, however, trade at less than $20 per share. They’re often behind new, small, or at-risk companies, which is where the risk for traders comes in.
However, there are lots of advantages.
For one thing, you can take a large position on pink sheet stocks because they’re priced so low. Instead of buying 10 shares of a $100 stock, for instance, you could buy 1,000 shares of a $1 stock. Since price movements happen quickly, you take profits or losses much faster.
Even if a pink sheet stock moves by only a penny, great returns are still possible. Let’s take the above example. You bought 1,000 shares for $2, and you sell when the stock hits $2.02. That’s a two-cent change.
You pocket $20 on the trade, minus fees with your broker.
That might not sound like much, but multiply those profits by hundreds of trades over months and years. You see where I’m going.
Pink sheet stocks are valuable because they allow you to capitalize on new companies that are experiencing upward trends. Or maybe you’re trading stocks in a company that has sunk extremely low, but shows promise for an upward trend in the near future.
But there are risks, too.
The high bid-ask spreads — the difference between the bid and ask prices — make finding buyers or sellers more difficult. Maybe you’re convinced a company will break out shortly, but you can’t find enough shares to purchase.
Worse, if a stock moves in a direction contrary to your prediction, you might not be able to find buyers so you can exit your position quickly.
Since analysts generally don’t cover these stocks, it’s up to you to do your research and verify information. You have to watch out for scams and other issues that could lead you down the wrong path. And since pink sheet stocks don’t have to provide fundamental data, information can prove limited.
The Pink Sheets Tier System
The pink sheets tier system involves five tiers that describe the stocks’ health and risk level.
Sticking with tiers one and two can mitigate your risks and stop you from making an ill-conceived trade.
Tier one is divided into domestic and international segments, while tier two is divided based on reporting information and listing locations.
Then you have the distressed tier, the dark or defunct tier, and the toxic tier. They represent high-risk stocks — especially the last, which includes stocks that are considered scams or have been promoted by unscrupulous industry professionals.
Key Profitable Secrets for Pink Sheets Trading
If you’re interested in pink sheets trading, you need to know how to mitigate risks and take advantage of potential breakouts and breakdowns. Let’s look at some of the most important factors to consider before buying or shorting pink sheet stocks.
Research the Pink Sheet Company that You’re Willing to Invest In
A little research goes a long way, but a lot of research makes you a smart investor. It’s amazing what you can dig up about a company if you’re willing to look.
For example, let’s say you have your eye on a penny stock that traded on the pink sheets. It looks promising, but the company doesn’t make any disclosures.
Head to Google. Seriously. Type in the company’s name, then click on the News tab at the top of the search engine.
This strategy can yield tons of information. Has another company announced it wants to acquire or merge with the company you’re interested in? Has the CEO recently been ousted?
Negative and positive news can tell you a lot about future price movement for a given stock.
Analyze the Pink Stock Price
Pink stock prices change pretty radically over just a few hours. This isn’t always the case, but I like to look for lots of price movement because I want to profit from my trade, whether I’m buying or shorting.
The only way to do this is to read charts. What has the stock price done over the last day? The last week? The last month? You need to know.
What’s the bid-ask spread? How much volume is out there? Answer all these questions so you know what you’re getting into.
Learn How to Find the Most Active Pink Sheets Stocks
To help find good trading opportunities, look for the most active stocks. When price movement intensifies, you could stand to profit.
Think about it. If a stock remains within a couple cents of its stock price for days or weeks, there’s no reason to trade that stock. You’ll take home a modest profit if you time your exit right, but I like to take advantage of supernovas that can theoretically put lots more money in my pocket.
Analyze the Effects of Trading Halts and the Deslisting Process
Trading halts and delistings occur for a variety of reasons. You can take advantage of halts in some circumstances, but you have to pay close attention.
A trading halt happens when the exchange, such as the pink sheets, temporarily halts all trading activity for a given stock. The company might have heard rumors about fake promotions, criminal activity, or something else.
Delisting happens when the pink sheets remove a company from its listings. The company might have gone out of business, gotten acquired, or violated rules.
You typically don’t have to worry about trading halts or delisting, but it’s helpful to consider what might happen if one of those events occurs in relation to the stock you’re trading.
Why Companies List on the Pink Sheets
Companies list on the pink sheets for the same reason that larger companies list on the major exchanges. They want to raise capital for business expenses.
Being Delisted from a Major Exchange
If a company gets delisted from a major exchange, it might list with the pink sheets to continue raising capital. Maybe the company has suffered a major hit and needs to rebuild itself.
When this happens, you need to pay careful attention. Why did the delisting occur? How has the stock been performing since it initially debuted on the pink sheets?
Are Pink Sheet Stocks Safe?
There’s no such thing as a “safe investment” or a “safe trade.” If there were, we’d all be instantly rich.
That doesn’t mean they’re all dangerous, though. If you’re willing to put in the effort, get to know the pink sheets and how they work, and research individual stocks, you can reduce your risk and make trading safer.
Risk X Reward
It’s always a matter of risk versus reward. Let me give you an example …
Say you see an infomercial for what a company is calling the most amazing vacuum cleaner to ever run across a hardwood floor. You’re intrigued. The company isn’t offering a guarantee, but you really want this vacuum cleaner.
We’ll go on to say that the vacuum cleaner costs $600 and promises to cut your vacuuming time in half. This is a risk-versus-reward situation.
The risk is that you buy the vacuum cleaner and it doesn’t work as expected. You might be able to sell it on Craigslist — probably at a loss — but you’ll still clap your hand against your forehead in dismay.
The reward happens when the vacuum arrives and performs exactly as promised. Your house is cleaner, you spend less time cleaning, and the cost becomes worth the product.
It’s the same way with the stock market. You’re taking a risk because you believe the potential reward outweighs it.
How to Learn About the Stock Market
Have I whetted your appetite for more information about the stock market? I hope so.
It’s my passion in life — next to the charities I help and the things I enjoy outside of trading. Over time, I’ve evolved from an active trader into a teacher. To date, I’ve helped more than 10,000 people learn to trade penny stocks.
You can find tons of information for free here on my blog. Read as much as you can every day so you become more comfortable with pink sheets and other aspects of trading.
Learn with Me in the Trading Challenge
Ready to step it up a notch? Apply for the Trading Challenge to dive deep into trading penny stocks and immerse yourself in the process. You’ll learn from me as well as my most successful students, many of whom have become millionaires.**
Will you become a millionaire? Maybe. Maybe not. But you’ll never know unless you try.
The biggest appeal that pink sheets carry for investors is their low price. These stocks are attractive to those investors who seek to get in on the ground floor of an up-and-coming company or who have hope for a company that was once great and shows promise of a rebound.
The biggest drawback to pink sheet stocks is the lack of transparency, the volatility and the lack of a stringent regulatory agency to protect investors. However, for investors willing to perform their own research and due diligence, these stocks can provide significant returns.
With the addition of the new tier system, there is hope for investors, as they can avoid those pink-sheet stocks whose extreme risk is unlikely to provide any opportunity aside from losing their buyer’s investment. This is also helpful to legitimate companies listed in the pink sheets to differentiate them from the pack.
Pink sheet stocks bear risk — often more than many other investment vehicles. However, for those diligent investors with nerves of steel and an eye for potential, pink sheet stocks represent an area of potential gain worth considering.
Have you invested in stocks found in the pink sheets? What’s your best advice for new investors who want to give it a try?