International stocks or microcap investments without a home on major U.S. stock exchanges typically are called “pink sheet” stocks or “over the counter” investments. The terms are from a bygone era on Wall Street when the physical elements of investing and the trading floor were much more prominent than in today’s digital age.
Pink sheet stocks got their name because their quotes actually were printed on pink paper, and OTC stocks were referred to as such because of a decentralized trading network with no physical stock exchange or meeting place for the deal — just a middleman with a counter and a telephone making the deals.
So what’s the big deal now that it’s the 21st century? Why should you care whether a stock is faithfully represented on the floor of the New York Stock Exchange or not?
The Upside of Pink Sheets and OTC Stocks
The truth is that many pink sheet stocks indeed trade just like regular investments, with some OTC picks actually dwarfing conventional NYSE or Nasdaq stocks. Take food products giant Nestle (PINK:NSRGY), one of the biggest consumer brands in the world that trades as a pink sheet, or car-maker Nissan (PINK:NSANY).
These companies are listed as pink sheets because they primarily are listed on a foreign exchange — the SIX Swiss Exchange for Nestle and Tokyo Stock Exchange in the case of Nissan — and the companies didn’t feel like listing officially with a U.S. exchange in addition to their countries of origin. Clearly Nestle and Nissan are established companies you can bank on and have faith in just like domestic blue chips.
What’s more, pink sheet stocks also can pay you dividends just like any other company. Sometimes there is a small exchange fee for foreign companies cutting dividend checks in a different currency, but this also often is true for NYSE-listed companies known as American Depositary Receipts — companies like Britain’s BP (NYSE:BP) or Finland’s Nokia (NYSE:NOK), for example. Simply put: OTC or pink sheet stocks have their dividends treated the same way as any other stock.
The Downside of Pink Sheets and OTC Stocks
Pink sheet and OTC investments have plenty of potential. However, they also have decided risks.
Almost all OTC stocks, domestic or foreign, are thinly traded when compared with exchange-listed issues. That means bid/ask spreads — the difference between what investors buying a stock are willing to pay and what investors selling a stock expect to receive — can be wider. Think of it this way: If one person wants to buy stock and four people are selling, it can be a race to the bottom if all those sellers are intent on making the sale immediately. Similarly, if one person is selling and four people want to buy right now, you can see prices soar.