Over-the-counter stocks

Over-the-counter stocks

Unlisted stocks are another name for over-the-counter (OTC) stocks. In contrast to stock exchanges such as the New York Stock Exchange or Nasdaq, they are often supplied by small businesses and exchanged by market makers. 

Bonds, stocks, and other financial instruments can be exchanged directly between two parties through the OTC (over-the-counter) market rather than on a public stock exchange like the NYSE or Nasdaq. A benefit of investing in OTC securities is that you can buy a successful stock early. 

What are OTC stocks? 

Over-the-counter (OTC) stocks are not traded on a formal exchange like the New York Stock Exchange (NYSE). Instead, they are traded through a network of broker-dealers who directly negotiate with one another over the phone or electronically. 

Whether or not investing in OTC markets is right for you will come down to your investment goals and risk tolerance. If you are comfortable with a bit more risk and are looking for more flexibility in your investment strategies, OTC markets may be worth considering. However, traditional exchanges may be better if you prefer a more stable and regulated environment. 

Understanding OTC stocks 

OTC stocks often trade for less per share than corporations whose shares are listed on an exchange. Many OTC companies, sometimes referred to as penny stocks or micro-cap stocks, trade for less than 5 USD per share. The low cost may make them appealing to individual investors. These cheap shares, however, can be dangerous and extremely speculative. 

Several electronic platforms are used for OTC transactions. The US’ Financial Industry Regulatory Authority (FINRA) ran one of the most well-known ones, the OTC Bulletin Board (OTCBB), until selling it to the investment bank Rodman & Renshaw. 

Types of OTC securities 

There are three major types of over-the-counter (OTC) stocks in the United States:  

• Pink sheets  

The Pink Sheets are stocks not listed on a major exchange, such as the Nasdaq or the New York Stock Exchange.  

• OTCQB (Venture Market) 

The intermediate tier, the OTCQB, has a high proportion of emerging businesses and is sometimes referred to as the “venture market”. OTCQB companies are subject to monitoring and must disclose their financial information. 

• Best market (OTCQX) 

This is the pickiest. Only 4% of the OTC equities listed on this exchange are traded here. It typically consists of international firms that list on significant overseas exchanges and certain US companies that want to someday list on the NYSE or the Nasdaq and have the highest reporting criteria and toughest scrutiny. 

How to buy OTC stocks? 

You can sell and purchase OTC stocks using most top online brokers because they trade similarly to most other equities. You must be aware of the corporation’s ticker symbol and also have sufficient funds in your brokerage account to purchase the necessary number of OTC shares. 

OTCs cannot be bought directly through the OTC Markets Group or the Over-the-Counter Bulletin Board (OTCBB). Instead of using individual investors, market makers handle all transactions. 

It’s critical to remember that all investments have risk and that investors should carefully evaluate their investment objectives before investing. 

When finding a reputable broker, it is important to look for a member of FINRA. Finding a broker with experience trading OTC stocks is also important. 

How are OTC stocks different? 

The volume of publicly available corporate information is the primary distinction between an OTC and a listed stock. It can be challenging to discover information on OTC companies, which leaves investors more open to investing in fraud schemes and reduces the likelihood that reported market values are based on accurate and comprehensive data on the company. 

A company might choose to list its stock on an OTC exchange instead of a formal exchange because it may not meet the listing requirements of a formal exchange. For example, the NYSE requires a company with a minimum market capitalisation of 100 million USD and that it has been profitable for at least four of the past five years. 

Another reason a company might choose to list on an OTC exchange is that it may be a start-up or small company that cannot afford the high listing fees of a formal exchange. 

Generally speaking, OTC stocks are riskier than stocks listed on a formal exchange. This is because there is less information available about OTC stocks and because they are not subject to the same level of regulation.

Frequently Asked Questions