In 2014, Google acquired Nest Labs – a company that develops smart thermostats, smoke and carbon dioxide detectors. The deal was worth $3.2 billion, and Nest quickly started gathering interest from the investment public. The price of the penny stock, NEST, quickly started increasing.
However, there was one major problem – this wasn’t the ticker of Nest Labs but that of Nestor. Furthermore, Nest Labs was a private company.
This article uncovers the mix-up and explores the factors that played a role in the following market frenzy.
The Confusion of Investors in Nest Labs & Nestor
Instead of investing in Nest, people bought shares in Nestor Inc., a communications equipment manufacturing and software development company founded in 1975.
Its stock’s ticker (NEST) confused many investors. The icing on the cake was that Nestor Inc. had been taken over by a court-appointed receivership since 2009.
People who didn’t do their due diligence drove this already bankrupt company’s shares to 10 cents. The price then closed at 4 cents, marking a 1900% increase.
In a nutshell, people were trying to buy a company that didn’t even offer stock publicly.
Nowadays, Nest Labs prospers as a part of Alphabet. Since then, the company has doubled its product portfolio and merged into Google’s hardware unit in February 2018, taking place next to Google Chrome and Chromecast.
Avoiding Cases like the Nest vs. Nestor Confusion
If investors had done their due diligence, they would have realized that Nestor Inc. (OTCMKTS: NEST) is a gray market stock.
Gray market stocks are traded over-the-counter (OTC). This means they are only offered by brokers and trading providers, not a stock exchange.
Simply put, a gray market is an unofficial market for trading securities. Stocks usually move there when suspended from official trading or new securities are bought and sold before their official listing. The gray market also allows issuers and underwriters to evaluate the demand for upcoming offerings.
When you take a position in a grey market stock, you bet on a company’s potential market capitalization ahead of the IPO.
Is the Gray Market Legal?
Grey stocks sell in an unregulated market, but they are not illegal. In that sense, there is no oversight authority responsible for maintaining the market’s operation.
How Do I Buy Shares in the Gray Market?
You can buy shares on the gray market with a broker offering access. Trading in this market is often conducted over the phone.
No official registered platform or person handles the trading. You will need to find a dealer that will help find the buyers and sellers.
However, you should bear in mind that it is not a regulated market, and there is no regulating authority you can approach in case of issues.
You may also like: What Indicators Should You Avoid Adding to Your Trading Strategies?
Takeaway: The Nest & Nestor Confusion is a Lesson on the Importance of Due Diligence
The Nest and Nestor confusion is a reminder of the role of due diligence in investment. The market frenzy resulted in a dramatic 1900% increase in Nestor stock, while those who conducted proper research reaped the rewards of the growth of Nest Lab as part of Alphabet.
It also highlights the consequences of hasty decisions and the broader truth about trading the OTC markets – succeeding requires a blend of vigilance, knowledge, and rationality.
