The Pink Sheets are sometimes called the Wild West of the stock market because many federal trading rules and regulations do not apply. Not all stocks traded on the Pink Sheets are penny stocks, but almost all penny stocks trade on the Pinks. A penny stock is defined by the SEC as a stock trading under $5, with some exclusions. So, if you want to buy a penny stock that trades on the Pinks, you may have some difficulty.
Penny Stock Restrictions
There are conservative brokerage firms that do not approve of their clients purchasing penny stocks or Pink Sheet stocks, so if you are doing business with one of these firms, you may have to find a different broker who trades these stocks. The top online brokerage firms trade penny stocks and Pink Sheet stocks, but that may not help you. All brokers are required by the SEC to evaluate your financial condition and investment experience, and provide you with a Schedule 15G to sign and return to them, before allowing you to place a penny stock order.
Placing an Order
If you are approved to trade penny stocks, or if the Pink Sheet stock you want to trade is not considered a penny stock, placing an order is also a bit different from an order for a listed or exchange-traded stock. Orders are routed through different market makers and, sometimes, do not trade immediately because there is no active market in the stock. If you put in a market order to buy or sell your Pink Sheet stock, you may pay much more than the quoted offer price or sell at a much lower price than the quoted bid price if your order is not routed by your brokerage firm to the exact market maker quoting the stock. This happens. To avoid surprises, always place limit orders. This means when you want to buy a stock that is offered at $10 a share in a quote, place your order at "10 limit" so you only buy the stock at $10 a share. Depending on your broker, you may not be able to place a good-till-cancelled or GTC order, so you will have to place another order the next day to complete your order. The same is true if you are trying to sell stock. Always use a limit order and don't rely on being able to sell your stock easily. Many Pink Sheet stocks trade only occasionally. Others are active during times when stock promoters are actively pumping the stock.
The Pink Sheets is one of three tiers in the OTC Markets Group, where unlisted securities trade in the United States. It has created ways for issuing companies to demonstrate legitimacy by complying with SEC rules and regulations regarding reporting, even though not registered with the SEC. The three tiers are: OTCQX, for the top OTC companies with strongest financial positions and most SEC-compliant reporting standards. OTCQB, for companies that report their financials but do not meet the financial strength requirements of the OTCQX. These are mostly startup companies. OTC Pink is where companies trade when they do not agree to comply with any financial or reporting standards. Some major foreign companies trade on the Pinks because they comply with the securities regulations in their own countries and don't feel it is necessary to comply with SEC standards, too.
The Pinks started out in 1913 when financier Roger W. Babson and financial book publisher, Arthur F. Elliot, formed the National Quotation Bureau and began publishing price quotes on stocks that were not trading on any exchange. These quote sheets were printed on pink paper, so traders started calling them the pink sheets. The name stuck. In 1963, Commerce Clearing House purchased the National Quotation Bureau to add to its list of publications. The Pink Sheets remained just a list of quotes printed on pink paper until 1997 when R. Cromwell Coulson and a group of investors bought NQB with the intention of creating an Internet-driven real-time stock quotation system similar to NASDAQ. It launched in 1999 and, a year later, NQB officially became Pink Sheets LLC. However, the name Pink Sheets gave way to a new idea: OTC Markets Group. Over 160 broker-dealers use the OTC Markets Group trading platform to trade over 10,000 securities, including stocks and bonds that are not listed on other U.S. exchanges.
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