A:

The stocks of well-known companies such as General Electric and Microsoft trade on major exchanges such as the New York Stock Exchange (NYSE) and Nasdaq. But companies like GE and Microsoft must be listed - that is, accepted for trading purposes by a recognized and regulated exchange - prior to actually trading on an exchange. When a company isn't listed, it often will trade on the Pink Sheets or the Over the Counter Bulletin Board (OTCBB).

A stock that doesn't trade on a major exchange is said to trade over the counter (OTC). This means that the stock is dealt between individuals connected by telephone and computer networks.

Companies will typically be listed on the OTCBB for one of two reasons:

(1) The company has been delisted from a major exchange. When a company is facing tough times and is unable to meet the requirements for continued listing on the Nasdaq or NYSE, it will be delisted. This usually happens to companies that are under financial strain and near bankruptcy. Even when listed on the OTCBB, companies are still required to maintain Securities and Exchange Commission filings and minimum requirements set by the OTCBB; however, these requirements are considerably easier to meet than those set by the national exchanges. If a company undergoes bankruptcy proceedings or misses certain SEC filings, an additional letter will be added to the company's ticker symbol to notify investors of this problem.

(2) The company may be listed on the OTCBB because it is unable to meet the initial listing requirements of the Nasdaq or NYSE. In such a case, a company may choose to test the waters of the OTCBB, using it as a stepping stone before leaping into the larger exchanges and markets.

The Pink Sheets are different from the OTCBB. Companies on the Pink Sheets are not required to meet minimum requirements or file with the SEC. So-named because they were actually printed on pink paper, the Pink Sheets started out as a daily quote service provided by the National Quotation Bureau. Typically, companies are on the Pink Sheets because either they are too small to be listed on a national exchange or they do not wish to make their budgets and accounting statements public. To avoid having to file with the SEC, some large foreign companies such as Nestle S.A. have penetrated the American securities markets through the Pink Sheets. Companies listed on the Pink Sheets are difficult to analyze because it is tough to obtain accurate information about them. The companies on the Pink Sheets are usually penny stocks and are often targets of price manipulation. They should only be purchased with extreme caution.

Want to start trading OTC stocks? Check out which online broker offers the best tools here

(To learn more about penny stocks (often associated with the over the counter market) check out: The Lowdown on Penny Stocks)

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