What are Pink Sheets?
What are Pink Sheets?
The term Pink Sheets refers to the electronic quotation system that deals with over-the-counter (OTC) trading of securities. It is derived from an early usage of paper-based quotation service that collects and issue bids and questions on quotation prices. The system is called pink sheets due to printing of bids and quotation prices in pink paper. There is no requirement such as filing of periodic financial statement in order to be quoted in the Pink Sheets. Also, Pink Sheets are used to be published by the National Daily Quotation Service. Today, Pink Sheets are published by a privately-owned company named Pink Sheets LLC.
The companies that are listed on the Pink Sheets are not listed on major exchanges or even with the Securities and Exchange Commission or SEC. This means that the company either fails or deliberately omitted to file information regarding their financial status, structural organization and other pertinent data. Small companies and those who do not want to disclose their budget and accounting systems are usually listed in Pink Sheets. Accordingly, companies on Pink Sheets cannot trade stocks in national major exchanges such as the New York Stock Exchange or NASDAQ.
In order to invest in companies listed on Pink Sheets, investors must first contact a broker. The stockbroker obtains quotes through an electronic data-market system. After this, he will enter the data. The order is then transmitted to the trader via computer or telephone. Next, it is routed to the market maker who executes the order. If the market maker is also the trader, he will execute the order by himself. A transaction report will then be received by the stockbroker, who will thereafter confirm the transaction with the investor.
Pink Sheets is different with Over the Counter Bulletin Board or OTCBB. A company is listed in the OTCBB merely because it initially fails to meet the minimum requirements set by the SEC. Also, a company may be listed in the OTCBB because it has been delisted in major exchanges due to, most of the time, financial constraints nearing to bankruptcy.
In line with this, the SEC categorizes trading and investing in Pink Sheets as very risky. Information regarding the company is very difficult to obtain because it is not made available to the public. Oftentimes, investors merely rely on their own research when investing in Pink Sheets. With this, biased and unreliable information may serve as the only basis for investing, resulting to wrong investment decisions.
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