Introduction to Pink Sheets
Pink Sheets is a stock quotation system for small, private companies whose stocks are not listed on the major stock exchanges like the New York Stock Exchange (NYSE). They are also known as over the counter (OTC) market. The stocks that are listed on pink sheets are mostly of lower values and risks associated with these stocks are not covered by the regulatory body.
Explanation
Pink sheets or over the counter (OTC) market is an American financial market providing quotation service for around 10,000 lower values stocks. This has got their name from the pink color paper on which stock prices were printed in the past. Though nowadays listings are electronically released, the name continues to remain the same.
Companies with their stock listed on pink sheets do not have any obligation to follow financial standards or reporting requirements. They do not need to register with the SEC (Security and Exchange Commission). The stock quotations are published on a daily basis; it includes bid and offer prices of listed securities.
Example of Pink Sheets
There are several reasons for which companies prefer their stocks to be listed on the Pink sheets market instead of major stock exchanges like NYSE. Let us understand such examples.
- Small private companies who are unable to meet the standards required to trade on the national level stock exchange, list their stocks on the markets. Their stock values are mostly of lower values (say less than $5). Trading in these kinds of stocks involves a great deal of risk for the buyers.
- Many companies choose sheets after getting their stock delisted from the formal stock exchange due to a fall in share values or because they were unable to pay fees or required penalty.
- Some foreign companies’ stocks which do not want to fulfill filing requirement of SEC (Securities and Exchange Commission) go for pink sheets market, for example, Roche holding Ltd, a large Swiss pharmaceutical company is one of top pink sheets stock. Volkswagen AG, German Car Company, Telstra Corp. ltd, Australia based telecommunication services are a few big names in the world of pink sheets stocks.
How Companies List on Pink Sheets?
There is not a lot of requirement on companies’ end to get their stock listed in the Pink Sheets market. They just have to fill and submit form 211 to the OTC compliance unit.
The form details companies’ financial information. For US-based companies, a statement of financial position should be according to the GAAP requirement. For international companies, the financial statement can be according to local accounting laws.
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Requirements for Pink Sheets
Pink sheets or OTC market is the least regulated financial market. There is no additional requirement except for the filing of form 211.
The companies can limit their financial disclosure as well, there is not much transparency, therefore It is comprised of penny stock, delinquent companies’ stock, companies with limited financial information, etc.
Risks of Pink Sheets
Pink Sheets stocks involve a great deal of risk. Sometimes fraud companies deliberately hide their financial information to get their stock listed on the markets.
And at other times they do not have any active business or asset i.e. shell companies; they raise monies through stocks and commit fraud to the investors. Also, since pink sheets stocks are thinly traded, therefore it is difficult to find a buyer at the right time. Thus, dealing with such stocks involves a significant amount of risk.
Advantages and Disadvantages
Advantages of Pink Sheet stocks are as follows:
- This stock can help smaller companies to raise capital through issuing shares and without the complexities of listing on the formal stock exchange.
- Sometimes the stock value gain increases as and when the companies succeed.
- Since these companies do not pay hefty exchange listing fees, therefore, the benefit from the increase in the share price exceeds the trade transaction cost.
Disadvantages of Pink Sheet stocks are enumerated as follows.
- The stock can belong to fraudulent companies who have deliberately not disclosed their financial information.
- Stocks can include shell companies shares with no active business.
- They are thinly traded stock i.e. it is not easy to find a buyer for these stocks and the seller may have to face a long waiting time before the stock can be traded.
Conclusion
Therefore, from the above discussion, it is fairly evident that the Pink sheets market is a blessing for smaller companies who want to raise capital through the issue of shares. These stocks are fairly risky for buyers. Since there are no obligations for companies to disclose all the financial details; therefore, one has to be very careful before investing in these kinds of stocks. Investors should follow the trend of a particular stock; check the companies’ authenticity and its growth trend before actually investing in it.
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