Over-the-Counter stocks aren’t traded on normal stock market exchanges. There are many factors that weigh on OTC stocks’ availabilities and the degree of investment risks. Therefore, investors should thoroughly understand OTC stocks before placing a buy order.
How Do OTC Stocks Work?
To start, investors should research how standard stock trading works. Some well-known companies — the Googles and Amazons of the world — are listed on stock exchanges.
Traditional Stock Exchange Listings vs. OTC Stock Listings
The most familiar exchanges in the U.S. are the New York Stock Exchange and the National Association of Securities Dealers Automated Quotations. Both of these have listing requirements, employing specialists and high-grade technology to facilitate trading. These measures help reduce volatility and create liquidity.
Additionally, a company must meet certain parameters for its shares to be listed on the exchange. For example, requirements to list on the Nasdaq market include a company’s price per share of at least $3.00 and assets of more than $4 million.
This is where OTC stocks differ. OTC stocks are not listed on stock exchanges, but they are typically traded “over the counter” with a designated broker-dealer regulated by FINRA, who will subsequently buy and sell orders.
OTC stocks receive less scrutiny regarding listing requirements, and they act as an alternative for smaller companies to receive investment. However, due to the lack of transparency of financial information, company size and the ability to trade securities rapidly, OTC stocks are considered highly speculative, and many of them are penny stocks.
What Is Considered an OTC Stock?
There are four tiers of OTC stocks, each aiming to offer a clear perception of an OTC company and its stocks:
- Pink Sheets
- Grey Market
OTCQX is the premium tier of OTC stocks. These listings require up-to-date audited financials and disclosures to qualify for this category. They cannot be a shell company, a penny stock or in bankruptcy.
As a company in its early stages, OTCQB-listed stocks also cannot be in bankruptcy. They have a minimum price of $0.01 and must comply with U.S. audited financial account measures under the Generally Accepted Account Principles, also known as GAAP financials.
Also known as the “Open Market,” Pink Sheets are an extremely risky territory for OTC stocks. The Pink Market does not require its companies to disclose financial information, and there is no minimum for financial benchmarks. These stocks can include a variety of shell companies or others that trade overseas.
The gray market refers to all other OTC stocks with even poorer regulatory compliance. Often, they have no financial information, and broker-dealers will not quote gray market stocks as investor demand is so low.
Is It Safe To Buy OTC Stocks?
The evidence suggests that OTC stocks carry extreme risk. Charles Schwab provides several reasons in which OTC stocks can be a potentially dangerous endeavor:
- Limitations on the availability of public information
- No minimum set of requirements to meet
- The financial risk attached to small market cap companies
Can OTC Stocks Make Money?
Yes, there is potential to make money on OTC stocks but commonly, investors lose money. Investors should take caution and familiarize themselves with how stocks work before making any decisions on adding OTC stocks to their portfolio.
Where Can Investors Buy OTC Stocks?
OTC stock trading is done through quotation services provided by the OTC Markets Group or the Over-the-Counter Bulletin Board. However, a broker is needed to buy or sell stock through these authorities.
Investors can buy and sell OTC stocks with many traditional brokerages in the U.S., but the available selections and associated fees will vary by platform. However, some brokers do not offer OTC stock trading at all. Nonetheless, here are some of the OTC stock options for investors:
Fidelity has an OTC portfolio that focuses on a blend of small-cap companies listed on the Nasdaq and OTC markets. However, it also requires customers to enable penny stock trading and acknowledge that they understand the risks prior to doing so.
Webull lists more than 100 OTC stocks on its platform, but the companies must be actively traded and have a market cap in the region of $5 billion. To put this in perspective, there have been more than 10,000 OTC stocks available to trade in the U.S. in recent years. Webull likely has restrictions on certain stocks in order to protect investors’ interests.
What Are Examples of OTC Stocks?
As discussed, there are several types of OTC stocks. Despite OTC stocks being associated with small penny stocks, there are many multinational corporations that trade American Depositary Receipts on the OTC markets. ADRs, simply put, represent a share of a foreign company’s stock.
Companies use this tactic because it’s cheaper than a stock exchange listing while still attracting overseas investment. So while most OTC stocks may be unfamiliar to investors, there are also giant corporations trading on the OTC markets. Nestlé, Volkswagen, Adidas and Nintendo are all examples of large multi-billion dollar companies that sell ADRs on the OTC markets.
OTC stocks are probably not the best idea for stock market beginners, and new investors should familiarize themselves with how stocks work before making any investment decisions. While some OTC stocks carry less risk than others, the evidence points toward a highly speculative market environment with a strong likelihood of investors losing money.
Information is accurate as of Sept. 1, 2022.