What are otc stocks?

You hear the term otc stocks thrown around all the time. But exactly what are otc stocks? In the world of the stock market there is a set of guidelines that a company must be able to meet in order to have their stock traded on a formal exchange. If a company is too small, cannot meet these guidelines, have not been in business for long or may have a questionable credit background, they have the option of selling their stock as otc or over-the-counter. These can be also be debt securities, derivatives, bonds and other financial investments and are typically exchanged via a dealer network.

OTC stocks are generally listed on OTC bulletin boards or by the telephone. Something to be aware of if you are researching what are otc stocks is that there are no minimum quantitative standards that have to be met by the otc stock issuer. There are eligibility rules that they must abide by. While the otc market is often referred to as the fourth market, they are both popular due to the quantity of companies listed and can be risky.

When a company loses its ability to be listed on the NASDAQ it can fall into the otc stock situation. There are a lot of viable, good investments that can be made within the otc stock arena, but the investor must be informed. If a company cannot comply with NASDAQ requirements, they may also be listed as penny stocks. Due to the easier nature of availability, there is a lot more fraud associated with penny stocks and therefore the risk behavior is linked with otc stocks.

The internet has brought about a whole new world of fraud for the otc stocks. The "pump and dump" scams are one of the most popular. Associated with bogus companies that invest large funds in particular otc stocks and then pursue a marketing blitz designed to convince the investor they are worth more than their value. After a significant enough people buy into the scam and purchase the stocks, the value will increase and the bogus company does a major sell and walks away with the profits. The value then decreases, often below the purchase price and the investor is left with a bad deal.

Anyone who is not an experienced investor should stay away from the otc stocks, specifically the pink sheets. While there may be companies listed on pink sheets that could be a good investment, they are well hidden amidst those that are not. Only the most experienced should approach pink sheets (also known as pink quotes).

In the downtrend of the economy, many companies fell off the NASDAQ and stayed there for quite some time. The best bet is to watch these companies on the OTC stock area and see if they are getting closer to being relisted on the NASDAQ. Sometimes, it is only a slight circumstance that made the downfall, but the company themselves is experiencing a renewed resurgence and might be considered a good investment.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.