Playing in speculative stocks can be both frightening and extremely rewarding. In the past, unlisted stocks were quoted on the Pink Sheets.

The daily bid-ask paper quotes were eventually replaced, giving broker-dealers the capability to electronically trade and quote prices, so Pink Sheets no longer appropriately described the quotation system.

A name change occurred in from Pink Sheets to Pink OTC Markets, and again in to the current name of OTC Markets Group. The OTC Markets are broken into three tiered markets: OTCQX is the highest quality-controlled tier meeting ongoing financial and disclosure requirements. OTCQB is the venture stage with current reporting to a U. The difference in the three levels is denoted by the amount and quality of information provided to investors.

OTC Pink Stocks OTC Pink, the most speculative marketplace, can still trade some high-quality companies, which for one reason or another are unable to release audited up-to-date financials. For instance, a company undergoing an extensive accounting review may fall on the OTC Pink because it lacks audited financials. But there are also some worthless companies. Because a wide range of companies are listed, each with a unique profile and level of public information, investors need to be even more diligent when selecting stocks from this market.

Stocks listed on the OTC Pink can be either foreign or domestic. They range from fairly strong companies with more in-depth levels of disclosure and regulatory filings to defunct companies and even scams.

Domestic companies that list on the OTC Pink often fail to meet one or more listing requirements , although some of these companies are strong, going concern entities. In contrast, many worthless companies are on the list too. Due to the wide range of companies, the OTC Pink has created a tiering system so that investors can more readily judge the business and financial strength of the potential investments. There are three levels based on degree and timeliness of available information. Companies can provide information in three ways:.

The OTC Pink Three Tiers are as Follows: OTC Pink Current Information includes companies with publicly available filings made on the OTC Disclosure and News Service by complying with the OTC Pink Basic Disclosure Guidelines.

It is important to note that companies are placed on this tier based on compliance with the required level and timeliness of disclosures, and not based on the strength of operations and business soundness. OTC Pink Limited Information is used for companies with financial reporting issues, companies in bankruptcy or companies in economic distress, as well as companies unwilling to meet the OTC Pink Basic Disclosure Guidelines.

To be placed on this tier, companies must have made an SEC filing or have released financial information within the past six months on the OTC Disclosure and News Service. No Information is the lowest level of disclosure.

These companies either have no disclosure of information, or the released information is more than six months old. The skull and crossbones symbol used to signal this warning is placed on securities to warn of potential scams, failure to comply with disclosure rules such as with corporation actions in a timely manner or other questionable or fraudulent activity. Making Investment Decisions Analyzing OTC Pink stocks is an extremely important component of making investment decisions. Technical analysis may be extremely limited and difficult given the nature of the trading and quotation service, since there is no central "exchange" for the securities.

This means securities that trade on the OTC Pink have broker-dealers who must communicate and trade directly with each other. This can result in stocks that have less liquidity or wide bid-ask prices.

Therefore, fundamental analysis should be performed. Weeding through the thousands of OTC Pink Stocks to find the hidden gems is made easier by the information tiering system. Devising stock screens is a good way to dwindle down the number of potential candidates.

Depending on investment objectives , a top-down screen based on company size, industry, domicile and select financial data, such as level of revenues or profits, can be used. After the initial top-down screen, investors can apply a more bottom-up approach. Starting with common household names and moving down the narrowed list of stocks, investors can then screen based on financial ratios such as price to sales or enterprise multiple if screening on the Current Information tier, and depending on the stage of the company and information available.

One problem that may be encountered is that this information may not be uniformly presented or available, so some legwork is necessary to put it all together. With the narrowing screens complete, looking for a catalyst for each name will further taper the list of candidates.

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Catalysts can include any positive news that may propel the stock higher such as a pending legal announcement, a clinical trial, the release of past-due full financial information at the conclusion of an accounting review, a new product, or pending merger or acquisition activity.

By the end of this process, individual stock analysis is needed. Because these companies, in one way or another, have more limited disclosures than the ones filed with the SEC, contacting company management is a critical component to analyzing the business operations and stock potential.

The Bottom Line The OTC Pink offers a variety of investment candidates including many good companies waiting to be discovered.

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Recently, the OTC Pink has worked hard to improve the service by tiering companies based on level and timeliness of information. This helps investors steer clear of the defunct and toxic companies that are often no more than scams. This tiering system provides a starting point from which to do fundamental analysis to find strong, healthy companies with potential catalysts that may provide incredibly high returns.

Just like any other investment, the key is in doing rigorous homework, and in particular, talking to company management teams, to identify valuable investments. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam.

Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. How To Play The OTC Pink Stocks By Kristina Zucchi, CFA Share.

Companies can provide information in three ways: Most OTC Pink companies do not follow this standard. International reporting standard in which non-U. Alternative reporting standard, which is used for companies that do not follow SEC filing but still need to publish basic information to be listed according to Exchange Act Rule 15c This information is based on the OTC Pink Basic Disclosure Guidelines.

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Being early to a party may not be hip, but being early on a rising stock certainly is. Pink Sheets stocks offer exciting opportunities to increase portfolio returns by large magnitudes in a short time. However, these opportunities come with significant risks.

Pink Sheets is a listing of over-the-counter stocks that are not listed on any established exchange such as the New York Stock Exchange or the NASDAQ. Penny stocks are speculative and highly risky investments.

Lack of government and stock exchange oversight and general information leaves penny stock investors open to sudden losses. The over-the-counter market is a decentralized market in which unlisted securities trade. Here are the answers to all the questions you have about stock exchanges but are too afraid to ask. Penny stocks can soar in a short period, but dabbling in them is a dangerous game.

Here is a breakdown on the risks and rewards of penny stocks. Penny stocks are like a house of cards: Knowing how the primary and secondary markets work is key to understanding how stocks trade. Read about pink sheets, the electronically driven over-the-counter market in which broker-dealers connect to trade the stock Short selling is an effective trading strategy that can be employed to hedge the risk of a loss on an off-setting position All orders of OTC securities must be made through market makers who, instead of just matching orders, actually carry an inventory The stocks of well-known companies such as General Electric and Microsoft trade on major exchanges such as the New York Stock Learn about the over-the-counter, or OTC, market and how to purchase its stocks.

These stocks are often risky, but some offer Learn about the significant disadvantages and risks that are involved for investors seeking to trade in over-the-counter An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable.

In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money.

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