Pink Sheets Electronic Quotation System - Where Stocks Go to Die

You go to your mailbox and fish out a pamphlet of a post card that is touting some penny stock saying it is going to go through the roof, but you don't recognize the name of the company and there is good reason for that; most likely that stock is trading on the Pink Sheets. The Pink Sheets (officially called Pink Quote) are filled with stocks that have either just started up and do not have what it takes to make it on a bigger stock exchange, or stocks that were once listed and have since been delisted because of bankruptcy, price decline, or some other cause to be delisted.

Contrary to what many believe, the Pink Sheets are in fact not a stock exchange but rather an electronic quotation system for Over the Counter (OTC) stocks that allows broker-dealers to post their bid and offer for various stocks. Most of the stocks on the Pink Sheets are closely held and thinly traded and because the Pink Sheets are not an exchange the stocks that trade on the Pink Sheets do not have to do any reporting to the Securities and Exchange Commission (SEC) or maintain any kind of audited financial statements.

The term "Pink Sheets" comes from the time before 2000 when the system went digital. Originally started way back in 1913, the Pink Sheets used to printed and quoted on pink sheets of paper and thus the name was born.

When I was a stock broker it was very common for one of my clients to come in with a "stock tip" that they had received and the underlying stock be one that was traded on the Pink Sheets. This always led me to give a multitude of warnings. Because there is no reporting of any kind required from these companies it is very hard to obtain any accurate information on them in order to formulate an educated decision as to buy or not. In fact, many professionals consider Pink Sheets the riskiest of the risky.

While it may be enticing to see such inexpensive stocks and we all want to find the next Microsoft, the Pink Sheets are simply a risk that you may not want to take. It really isn't a place for the faint of heart and if you recognize the name of a company that is trading on the Pink Sheets it will be because it has been delisted from a major stock exchange and has gone there to die.

Source: U.S. Securities and Exchange Commission, Pink Sheets, U.S. Securities and Exchange Commission