Pink sheet stocks are equities that trade through an over-the-counter (OTC) market rather than a major exchange such as the New York Stock Exchange (NYSE) or the Nasdaq (NASDAQINDEX:^IXIC). Over-the-counter is another term for off-exchange. It means that transactions occur directly among dealers, which are usually brokerages.

The pink sheets market gets its name from the fact that its stock quotes used to be published on pink paper, although trading has since gone electronic. OTC Markets Group (OTCM 0.11%) is the company that provides the OTC listings, but the "pink sheets" name is still frequently used when referring to the market or the stocks that trade on it.

Many stocks listed on the pink sheets are penny stocks, which have very low market capitalizations and share prices -- usually less than $5. But they're also volatile and risky.

Reputable foreign companies may opt to have their shares traded through the OTC market because they prefer not to report to the U.S. Securities and Exchange Commission (SEC). Volatile penny stocks and companies that don't adhere to SEC reporting requirements are also prevalent in the OTC market. That's why pink sheet stocks have a reputation for being riskier than those that trade on major stock exchanges.