Over the counter
Over the counter (OTC) stocks, also called "bulletin board" stocks, "pink sheet" stocks, and unlisted stocks are not where Fools generally invest their money. (There is an exception, see below.) Instead, fools (lower case "f") do. Companies trading OTC generally do not have to file documents with the SEC, can become public through a reverse merger and thus never have to disclose anything as pesky as a proxy statement for an IPO, and usually are shells of companies that don't have revenue, often don't have products, and are often hyped by hucksters sending mass emails out to suckers ... I mean investors, in what should be viewed as pump and dump schemes.
In other words, stay far away from these stocks, Fools. With hundreds, if not thousands, of companies trading on the NYSE or the AMEX and elsewhere, recognized exchanges with strict criteria for being listed, why should you wish to go to the pink sheets? If you want to gamble with your money, go to Las Vegas and put it all on 33.
Sometimes legitimate stocks trade over the counter because they are too small to meet an exchange's requirements for listing, or they may have been delisted for reasons including a failure to file documents in a timely fashion. Trading over the counter means broker/dealers communicate amongst themselves to do the buying and selling instead of using organized and regulated stock exchanges such as NYSE, AMEX, and NASDAQ.
- ===The EXCEPTION===
The one notable exception is when large, foreign corporations do not, for whatever reason, file to trade as American Depositary Receipts or American Depositary Shares, and thus are not listed on the major U.S. exchanges. They can then have their shares traded on the pink sheets. Nintendo is one such company, as is BMW.
- ===Another Meaning of the Phrase===
But don't get carried away with the negative. Don't forget that the Nasdaq is itself an over-the-counter market, or dealer market, which is different than a market in "over-the-counter" stocks, which do not meet the rules qualifying them to trade on the major exchanges. A dealer market in this case means that dealers -- so-called "market makers" -- are trading from their own stock accounts, using their own research and expertise. The dealers communicate by electronic means.
And unlike lesser-known pink sheet companies, Nasdaq-listed companies are required by the exchanges rules to, for instance, make available to shareholders an annual report containing audited financial statements of the company and its subsidiaries.
The National Association of Securities Dealers (NASD) was formed by the SEC in 1938 to regulate trading in the "over-the-counter" markets. The Maloney Act created the NASD to be a self-regulating body enforcing fair practices, thus increasing confidence in the markets. NASD remained under the auspices of the SEC, which had say-so over its decisions.
Related Fool Articles
Recent Mentions on Fool.com
- Prestige Brands vs. Church & Dwight: Where Should You Invest?
- 1 Thing Dividend Investors Need to Consider Before Buying Stock in Foreign Auto Companies
- Are Foreign Taxes Crushing Your Dividends?
- Breaking Down Arcam AB's Q1 Earnings -- FastEBM and New Orders
- Why Prestige Brands Holdings Inc. Shares Temporarily Soared
- Johnson & Johnson Earnings: Will Tuesday Bring More Good News for J&J?