What are Pink Sheets Stocks?

There is a big debate on whether they should be allowed or not. To see how they affect investing and the economy in total, we shall detail what they are, how they work, and how they act.

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How do they Work?

Pink sheets work on the same or similar principles as that of generic stocks. The core idea is that demand meets supply and prices alter themselves accordingly. The stock begins trading at a certain price, and low demand or high supply moves the prices downward in small ticks (ticks are the minimum amount a stock price can move). High demand and low supply push the prices in an upward direction. A transaction happens when theThe ask price is the lowest price of the stock at which the prospective seller of the stock is willing to sell the security he holds. In most of the exchanges, the lowest selling prices are quoted for the purpose of the trading. Along with the price, ask quote might stipulate the amount of security which is available for selling at the given stated price.read more asking priceAsking PriceThe ask price is the lowest price of the stock at which the prospective seller of the stock is willing to sell the security he holds. In most of the exchanges, the lowest selling prices are quoted for the purpose of the trading. Along with the price, ask quote might stipulate the amount of security which is available for selling at the given stated price.read more is equal to the bid price. However, there are a few main differences between regulated stocks and pink sheets.

  • They are unregulated and do not cover the government’s guarantee or the audits forAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more-based trading companies.The market for pink sheet stocks is small compared to that of the IPO-based stock market.The transaction charges are pretty high compared to stock markets, especially because the demand and supply match is low and operational costs are high.There are no financial standards to be followed, and the company does not have to disclose anything. Any disclosure remains an intended detail the owner puts out.In general, delinquent, distressed, and bankrupt companies are the companies that are traded in pink sheets.

Example of Pink Sheet Stocks

For those who have watched the 2013 film “Wolf of Wall Street,” pink sheets will certainly not be a new term. Since the 1980s, pink sheets have changed how they are being traded and how they are being cost. The transaction charges have gone down quite significantly from the past 20 years. With the rise of the internet, companies like OTC Markets created a platform to tradePenny Stock refers stocks of public companies that trade at a very low price, typically less than $5 per share and are highly illiquid. Usually, these stocks belong to small and newbie companies with a low market capitalization.read more penny stocksPenny StocksPenny Stock refers stocks of public companies that trade at a very low price, typically less than $5 per share and are highly illiquid. Usually, these stocks belong to small and newbie companies with a low market capitalization.read more. Before such companies existed, people would have to call brokers to see if they wanted to invest in penny stocks.

OTCmarkets.com gives information about the stocks they trade. On their website, they call penny stocks like penny stocks – which is a widely used term for them in the USA. And they quote that they trade about 10,000 stocks and about 60% of them are a penny. So, giving examples and wasting time on them would be pointless because a small google search can reveal hundreds of examples, if not thousands.

source: OTCmarkets.com

So, instead of looking at them, let us look at a penny stock that explains how penny stocks can be useful. Tencent, a Chinese company, is one of the world’s largest software companies, and it is valued at over 200 billion US dollars. But people who want to buy these stocks in the USA have no chance to do so. The Chinese regulations over foreign investmentsForeign InvestmentsForeign investment refers to domestic companies investing in foreign companies in order to gain a stake and actively participate in the day-to-day operations of the business, as well as for essential strategic expansion. For example, if an American company invests in an Indian company, it will be considered a foreign investment.read more are pretty stringent. So, companies like OTCmarkets go ahead and sell unsponsored ADRs of Tencent in the USA. The code for Tencent is TCEHY (OTCmarkets.com).

ADRs are American depository receiptsAmerican Depository ReceiptsAmerican Depositary Receipts (ADR) refer to negotiable certificate released by the US depository bank and comprise a certain number of stocks with atleast one foreign company’s shares. It is freely traded on the US stock markets, just like the other domestic stocks.read more and are essentially a way to buy stocks of an international company. Sponsored ADRs are bank-bought ADRs that are formally traded, and since banks don’t prefer to trade some companies, pink sheets provide a platform for them to raise more money if needed. And opening up to markets benefits more information flowing into the market.

Advantages

Some of the advantages are as follows:

  • These stocks provide an additional medium for trading. It increases the stocks’ liquidity, and its actual price can be easily realized. And the more the mediums of trading, the higher the number of people who keep trading.For companies, pink sheets provide a ‘no minimum requirement’ for either revenues or profits or their business. Companies that are traded under this will not be audited as regular companies. The companies need not show concern or need not be in running condition for 3-4 years, which is mandatory for companies to go public.From a company’s perspective raising money through pink sheets is an absolute delight in the freedom they go to IPO. There is no limit on the share price minimum or the number of shareholders. Fewer regulatory bodies also govern them, and they don’t even require annual shareholder meetings or a formal set ofBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company’s policies, dividend payouts, top-level managers’ recruitment or layoff and executive compensation.read more board membersBoard MembersBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company’s policies, dividend payouts, top-level managers’ recruitment or layoff and executive compensation.read more.From an investor’s perspective, they are volatile. They are available for less than one dollar, and the ticker rate is one cent. So even a movement of one cent in the stock price varies the profits by a good percentage. So, pink sheets might be a great option for those trying to trade instead of investing in the long term.

Disadvantages

Some of the disadvantages are as follows:

  • The benefits for companies are all trouble for investors. Investing in non-regulated, non-open companies can be a considerable risk.A lesser amount of research will be available to invest in pink sheets.The SEC says that these stocks are a very risky investment.They are very volatile, almost as volatile as option prices are.Sellers would have to be able to sell their shares at a very low price in case of emergency liquidation.

Conclusion

There is no debate that pink sheets are not regular investments. The debate is around whether they are to be allowed, and the recent Sarbanes Oxley act of 2002 made it more difficult for companies to raise capital via this method. However, it remains one of the easiest ways for companies to raise capital, and they are the first step for many companies to go public. Many companies raise money via pink sheets, get going and then get into an official listing.

This article has been a guide to pink sheets and their meaning. Here we discuss how pink sheet stocks work along with an example, advantages, and disadvantages. You can learn more about corporate finance from the following articles –

  • Distressed SaleFAANG StocksBlue Chip StocksValue vs. Growth Stocks