Pink, or the Open Market, is the most speculative and loosely regulated of the three marketplaces for tradingover-the-counter (OTC)stocks electronically through a broker-dealer network.
Pink market companies do not have the same criteria to fulfill as the companies listed on national stock exchanges, such as the New York Stock Exchange (NYSE), or even more stringently regulated OTC markets such as the OTCQX. Many of them are low-priced penny stocks that trade for under $5 a share.
These companies used to be known as pink sheets because the quotes of their share prices were once published on pink-colored paper. Today, they are managed by the OTC Markets Group.
Key Takeaways
- Pink is the most speculative and loosely regulated of the three marketplaces for trading over-the-counter (OTC)stocks.
- These companies used to be known as pink sheets because the quotes of their share
prices were once published on pink-colored paper. - The only real criteria Pink stocks have to meet is disclosing their quarterly and annual financials.
- Disclosure rules introduced in 2020 made the Pink market much more transparent than before.
- The Pinks are generally still high risk, however, comparable to national stock exchanges or even other OTC exchanges.
Pink Market Listing Requirements
OTC Market Group has three regulated main marketplaces for trading OTC stocks: OTCQX,OTCQB, and the Pink market. The Pink market is the easiest one to get into. Broker-dealers can trade securities here without company involvement.
All a company needs to do is submit electronic Form 211, which is provided by the Financial Industry Regulatory Authority (FINRA). Usually, this is done on behalf of a company by a market maker. The form asks for current financial information.
Pink Market Disclosure Rules
It's also now necessary for Pink market companies to update investors about their performance. Broker-dealers and other market makers are no longer able to publish quotations for stocks that do not provide publically available information about their financials according to the guidelines set out by OTC Market Group. That was part of an amendment made to Rule 15c2-11.2 in 2020.
Failure to abide by these rules could lead to getting moved from the Pink market to the Expert market, where there are no public broker-dealer quotations.
Disclosure requirements include publishing quarterly and annual financials, which don't need to be audited but must be prepared according to U.S.GAAPor International Financial Reporting Standards (IFRS). This is key information that helps financial professionals and investors make decisions when evaluating a company as a potential investment. Without it, it can be very difficult—if not nearly impossible—for an average investor to get any real information regarding these companies.
Disclosure requirements have made the Pink market much more transparent than before. However, it's still not comparable to national stock exchanges or even other OTC exchanges such as OTCQX or OTCQB. Generally, the more requirements placed on companies, the harder it is for them to be shady and dupe investors.
Pink market companies can be demoted to "Limited Information" status if they fail to fully respect disclosure requirements.
Advantages of the Pink Market
The biggest advantage of trading in the Pink market is that many of the companies are very inexpensive per share—some cost even less than $1. Because of this, even penny moves can mean a great return for an investor because of the higher volatility levels.
Being early to a party may not be hip, but being early on a rising stock certainly is. In the Pink market, you can invest in a small company that may not be nationally known. Investing in this company can be quite profitable if it continues to grow; it may even end up on a major exchange in the future.
Another advantage is finding a once-strong company that has subsequently been beaten down. If a company was once listed on a major exchange like the NYSE but has been delisted because it no longer meets certain requirements, an investor could buy shares of that company with the hope it could make a comeback. Usually, a company is delisted because of a major financial event that makes the company's future bleak.
Some big-name foreign companies also trade on the Pink market, including Chinese multimedia company Tencent.
Disadvantages of the Pink Market
One should not forget that there are many disadvantages for investors to consider as well. First and foremost is limited information. These companies don't need to report as much information to investors. This can make it difficult to know what you're buying and how the company is doing over time.
Thinly traded companies are another disadvantage. Sure, you can buy 1,000 shares of the next Microsoft, but what if you made a nice profit and want to sell? When a stock is thinly traded, the chances of getting out without driving the price down are slim. No matter what the market, if you can't find a buyer, you won't get out of your position, and this is an even more difficult situation when it comes to Pink market companies. Bid-ask spreads are very high, and high bid-ask spreads can make it difficult to initiate a position in the stock.
Investors also have to be aware that these companies are not usually covered by analysts. If you reador watch financial media, they rarely (if ever)cover a company that is not listed on a major exchange. This requires a lot more due diligence on the part of the investor to locate information. Of course, that information may or may not be worthwhile in the end.
Understanding the basics of the bid-ask spread can help a Pink market investor make better decisions regarding which investments to make and which ones to avoid.
The Other OTC Markets
OTC Market Group has several regulated main marketplaces for trading OTC stocks: OTCQX, OTCQB, and the Pink market. Each of these markets has varying levels of financial standards and regulatory oversight.The OTCQX carries the most stringent requirements, followed by the OTCQB, and then the Pink market.
There's also the Expert market, whichprovides the lowest level of disclosure and, subsequently, trading is limited to quotation on an unsolicited basis.
OTCQX
The OTCQX, also known as the Best Market, is made up mainly ofblue-chip stocksfrom overseas. Shell companies, penny stocks, and those facing bankruptcy cannot trade on this market.
OTCQB
The middle tier, known as OTCQB or the Venture Market, consists of early-stage and developing U.S. and international companies not yet able to qualify for theOTCQX.To qualify, companies must be current in their reporting, undergo an annual verification and management certification process, meet a $0.01 bid test, and not be in bankruptcy.
Companies that don't qualify for one of the two markets above, go into the Pink market or, worse, the Expert market.
OTC Market Classifications
Limited Information
These are companies that fit one of the following criteria:
- They have information that is available to the general public, but is older than six months and does not usually conform to the Pink market guidelines.
- They have filed with the SECbut have not updated their information.
- They have filed information with the OTC Disclosure and News Service. They must have at a minimum, a balance sheet, income statement, and shares outstanding within the last six months.
- They have gone bankrupt. Newly bankrupt companies are required to file information with the OTC Disclosure and News Service promptly.
Dark/Defunct
These types of companies will fall into this memorably named tier:
- Gray Market: The symbol for the gray market is an exclamation point. Companies in this category do not have a market maker or market transparency. Trades in this category are made by a broker-dealer and reported to their self-regulatory organization (SRO). The SRO will distribute the trade information, which is how prices can be tracked.
- No Information:The Pink Open Market previously had a category of No Information securities, which identified companies that were defunct or had not filed any information with either the SEC or the OTC Disclosure and News Service in six months, warranting caution for investors. In 2021, following updated SEC transparency rules, securities that were once labeled “No Information” moved to OTC Market Group’s Expert Market, which is only available to broker-dealers and other professional investors, not to the general public. They are not promoted as investment options for average investors.
Toxic
This tier advertises its extreme risk level by having a skull-and-crossbones symbol. There is only one category in this group:
- Caveat Emptor.Here, the title says it all:"buyer beware." The Caveat Emptor tier is described as consisting of stocks that are the subject of unsolicited spam, questionable promotion, regulatory suspensions, disruptive corporate actions (including reverse mergers), or other public-interest concerns." These are companies that are either scams or not actual businesses.
How to Invest in Pink MarketStocks
If you are interested in investing in Pink marketstocks you will need to find a broker. If you already have a brokerage account, the broker may allow you to trade these types of stocks. There's no guarantee, though: Some brokerage firms only allow seasoned clients trading privileges in this market.
Your broker may also ask you to sign an additional form that says you understand the risks associated with trading Pink market stocks. A lot of investors like to use a different broker with better rates—some will charge a flat fee and others will charge a different fee to trade thesestocks.
Why Would a Company Trade on the Pink Market?
OTC markets like the Pink Market are sometimes a good option to trade shares of companies that are too small or otherwise don't meet the listing criteria for major exchanges.
Are Pink Market Stocks Risky?
That depends. You can find all kinds of companies in this market. Lots of them, however, are penny stocks, which are often more volatile and riskier than larger companies listed on traditional exchanges. Pink companies probably don't meet the minimum requirements for other exchanges. Alternatively, they may be wishing to save money or hiding something.
The biggest appeal of Pink marketcompanies is their low price, and they are attractive to those investors that really want to get in on the ground floor of an up-and-coming company. Understanding the risks and the potential for losing your entire investment will allow you to make better decisions regarding these most speculative stocks.
Who Runs the Pink Market?
The Pink Market is run by the OTC Markets Group. OTC Markets Group hosts securities in three tiers: OTCQX, which has the most stringent listing requirements, the OTCQB, which is the venture market, and the Pink Open Market, which includes companies in financial distress or bankruptcy.
The Bottom Line
The Pink market is the most speculative of the three main marketplaces for trading OTCsecurities. There aren't many restrictions stopping companies from trading there and that has led to many investment horror stories.
The market has come a long way over the past few years, though. With the help of the expanding OTC markets, more information and some standards have been set to help investors find out about the companies trading there. Yes, it is still a much riskier place to invest and should be avoided by most investors. However, transparency is improving and that's a great thing.
