The pink sheets are a scary place, where you better know what you’re getting into before you dabble, with one exception–international stocks.

A little history

At one time, price quotes and the names of market makers for stocks not listed on stock exchanges were circulated to trading desks on long sheets of pink-colored paper.  That’s where the name “pink sheets” comes from.

The company that began this service in 1913, National Quotation Bureau, is now known as Pink OTC Markets and operates an interdealer quotation and trading service called Pink Quote, plus a financial web portal for small-cap OTC stocks, http://www.pinksheets.com.

Maybe there was a time when there were national stocks listed on the New York Stock Exchange, regional stocks listed on the Boston or Philadelphia or San Francisco Stock Exchanges and all the rest were tallied on the pink sheets.  If so, that was before I entered the business in 1978.  By the late Seventies, Nasdaq was well past its 1971 startup as a bulletin board and significantly down the road toward being the stock market power it is today.  So the process of pushing the toward the very smallest stocks had already begun.

Today’s listing choices

Today the regional exchanges have all but disappeared as primary listing venues for stocks.  But there are still a lot of listing choices for trading in the US, namely:

1.  NYSE

2.  NASDAQ–three levels of listing, depending on market capitalization and financial strength

3.  OTC bulletin board–only requirement:  listee must file financials with the SEC.

4.  What’s left, then for the pink sheets?  Domestic stocks that don’t file with the SEC (ugh!) because they’re too small or too thinly traded, and international stocks.

Pink Sheet levels

There are for practical purposes three tiers of pink sheet listing:

–Pink Quote/OTCBB–company has audited financials filed with the SEC

–OTCQX–company has audited financials

–Pink Sheets, sorted into in three flavors by the amount of information the company provides to investors

—–has current (unaudited) info,

—–has limited info,

—–has no info.

Pink Sheets Current is, to my mind,  the most respectable of the bunch.  That’s only because it’s where the stocks of major foreign companies like Nintendo or Nestle, which don’t have exchange-listed ADRs, are traded.  These companies choose not to file their financials with US regulators, although they do so in their home countries.  Admittedly, Swiss financials are no great shakes, but Japanese regulators require far more detailed disclosure than the US does.  It’s just that it’s all in Japanese.

Once you move away from these large-cap foreign names, though, you’re pretty much in the same position as a greenhorn from back East walking into a saloon in nineteenth-century Dodge City or the aptly-named Tombstone.

If you insist on buying pink sheet stocks…

…there are two other important things to pay attention to:

1.  Watch the bid-asked spreads.  Yes, $.18 bid -$.20 asked is only a $.02 spread–but that’s also 10% of the principal.

2.  Also, be careful to look at what typical trading volumes are.  If you buy a large position in a thinly traded stock, the bid-asked spread is the least of your worries if you want to get out in a hurry.