Pink Sheets Vs. OTC

You can buy or sell listed and over-the-counter stocks through your online broker.

You can buy or sell listed and over-the-counter stocks through your online broker.

Even though it can be a bumpy ride, the stock market has outperformed just about every other type of investment over long periods of time. Many companies that are household names have their stocks listed on major exchanges such as the NYSE or the NASDAQ, but there are a multitude of stocks that don't trade on exchanges. Their prices are listed in the so-called Pink Sheets, and you buy them in the over-the-counter market. The terms "pink sheets" and "OTC" are interchangeable. No matter what you call them, they operate the same way.

Pink Sheets

A stock that trades in the over-the-counter market is sometimes referred to as trading in the "pink sheets." The term originated around the turn of the 20th century. The National Quotation Board emerged in an effort to provide more accurate bid and offered prices for over-the-counter stocks. The NQB produced a weekly publication, listing the companies and their prices, printed on sheets of pink paper. The NQB went through a number of changes, eventually reorganizing first under the new company name of Pink Sheets, LLC, and later as OTC Markets Group.

Trading OTC

The process of trading over-the-counter stocks -- at least from an investor's perspective -- is the same as buying a listed stock. You decide how many shares of a particular stock you want to buy or sell. You have the option of entering a market order, which will execute at whatever price is available on the market at that time, or you can enter a limit order. Trading differences happen behind the scenes. Instead of trading on an exchange, over-the-counter stocks are traded through a network of broker-dealers. These dealers might rely on internal trades for their own accounts, or they might turn to market makers who stand ready to buy or sell stocks in a particular company to help maintain the market in that security.

Risks

The over-the-counter market has historically been a rowdier place to do business than the more formal world of stock exchanges. There are fewer reporting requirements for companies that want to trade their stocks over-the-counter, and consequently greater opportunities for hucksters and scam artists to perpetrate fraud on unsuspecting investors. Over-the-counter companies might be new, with little or no track record. It can be hard to find trustworthy information about them. They might have few or no assets. Their stocks might be thinly traded, making it hard to sell when you're ready, and even small trades can artificially inflate or deflate the stock's price.

Rewards

Just because a stock trades over-the-counter doesn't mean the company is small or disreputable. Many well-established, well-managed domestic and foreign companies choose to trade their stocks over-the-counter to avoid the extensive and expensive reporting requirements imposed by major stock exchanges and the Securities and Exchange Commission. While the OTC market typically represents greater risk, it might also offer greater reward. If you pick a winner in its early developmental stages and the company brings a successful product or service to market, its stock price could soar. But like every stock investment, 100 percent of your money is at risk. You could lose it all on the wrong pick.

 

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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