What are the OTC Stocks?

What are the OTC stocks? OTC stands for over the counter, and these stocks are securities that are traded in some way other than a formal stock exchange, like the NASDAQ, NYSE, AMEX, and TSX. Over the counter stocks can be traded on a dealer network or by other methods, but these stocks do not trade on centralized exchanges. To trade on the centralized exchanges, certain listing requirements must be met, and OTC stocks are usually stocks of small companies that are not large enough to meet the exchange listing requirements. OTC stocks are also referred to as unlisted stocks, and they are traded by brokers who are also dealers, using broker or dealer networks that trade over the phone or through computer networks. NASDAQ itself operates as a network of dealers, but it is considered a stock exchange and so OTC stocks do not trade on it.

OTC stocks usually trade on the Over The Counter bulletin board, or OTCBB, or on pink sheets. Not all OTC stocks are good investments, because sometimes these stocks may have bad credit records or ratings, or they may be considered penny stocks because of their extremely low prices. If the OTC stock is registered with the SEC and the reporting obligations are current, the OTC stock can be traded on the OTCBB. If not, the OTC stocks are usually traded on the pink quote system. Grey market or Other OTC stocks and other securities are ones which are not traded on either the pink sheet or the OTCBB markets.

OTC stocks do not meet listing requirements for the major centralized stock exchanges for a variety of reasons, some good and some bad. All the stock markets have maintenance and listing standards that are both qualitative and quantitative, and these listing requirements are very closely enforced and monitored. Businesses that have stock being traded on a market have a reporting obligation because of this fact. OTC stock, on the other hand, are not subject to the same regulations by the SEC, and have no requirement to make regular and consistent financial and corporate information available to the SEC and the market.

The OTC stocks represent both great risk and the potential for great reward, depending both on the OTC market and the skills of the trader. A lot of OTC stock is issued by businesses which have very limited histories concerning their operation, or they may be companies that are financially distressed with poor credit ratings. A lot of OTC stocks are considered mot liquid, because of the low trading volume and the difficulty that can arise when trying to sell OTC stocks. Unlike the major stock exchanges, OTC stocks do not have high trading volumes usually, which can mean waiting for a buyer, sometimes for an extended length of time.

Any investor in OTC stocks should use care. Many times an investment in OTC stocks can lead to a complete loss of the investment capital, so money should only be used that can be lost without any financial difficulty. Research the company and the stock, and look at past performance as much as possible. Research any available financial reports, and any data on management for the company. Keep in mind that it may be difficult to sell any OTC stocks invested in right away, without a waiting period until an interested buyer comes along. Just like any stocks, OTC stocks can be a worthwhile investment if the company is sold and has good management, but these stocks do generally pose higher risks of losses than the stocks traded on the centralized exchanges do.

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