OTC Markets: What It Is, How to Trade It, & Pros and Cons

As with any investment decision, it’s important to fully consider the pros and cons of investing in unlisted securities. Identifying which of the three OTC markets a stock is in can help guide your determination of a company’s relative investment risk—even though that information alone won’t help you decide if it’s a good investment opportunity. That’s why it’s still important to research the stocks and companies as much as possible, thoroughly vetting the available information. Because they trade like most other stocks, you can buy and sell OTC stocks through most major online brokers.

• OTC securities are generally considered speculative investments.
• Like other OTC markets, due diligence is needed to avoid fraud endemic to parts of this trading world.
• Basically, it’s selling stock that isn’t listed on a major security exchange.
• Keep in mind that these are only examples of these stocks and how they operate.
• Bankrate.com is an independent, advertising-supported publisher and comparison service.
• Bottom line is that U.S. companies need a real venture marketplace where they can access capital market investors and gain liquidity in their stock.

You look to be in early on what promises like a big deal, just like other storied early investors. Several days later, another investor, TechVision Ventures, contacts a different broker and expresses interest in buying Green Penny shares. The broker reaches out to various market makers and discovers that the price has increased due to growing investor interest. TechVision eventually purchases 20,000 shares at $0.95 per share from another market maker. In addition, companies traded OTC have fewer regulatory and reporting requirements, which can make it easier and less expensive when raising capital.

How to buy securities on the OTC markets

Trading over the counter gives institutional investors a certain degree of anonymity, at least in the early stages of the process. The first step an investor must make before trading OTC securities is to open an account with a brokerage firm. Check first to make sure it allows OTC trades if you’re going with an online discount broker. Interactive Brokers, TradeStation, and Zacks Trade are among those that do.

Legal and Regulatory Risks

OTC markets provide access to securities not listed on major exchanges, including shares of foreign companies. This allows investors to diversify their portfolios and gain exposure to international markets and companies that may not be available through traditional exchanges. Today, these platforms offer access to shares and other securities for a wide range of companies, from well-established foreign firms to small, emerging companies that don’t yet meet the listing requirements of major exchanges. The shares for many major foreign companies trade OTC in the U.S. through American depositary receipts (ADRs). These securities represent ownership in the shares of a foreign company.

Types of Instruments Traded

Penny stocks have always had a Bottom up investing loyal following among investors who like getting a large number of shares for a small amount of money. The investor ends up making a bundle if the company turns out to be successful. StocksToTrade in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites.

Companies presented on OTC Markets Group are distinguished into four tiers according to the available information. These tiers are created for the investors to provide data about businesses and the amount of published information. ​​The tiers also give no indication of the investment merits of the company and should not be construed as a recommendation. As we’ve seen, some types of stocks trade on the OTC markets for very good reasons, and they could make excellent investment opportunities. On the other hand, many OTC stocks are issued by highly speculative businesses or even outright fraudulent companies involved in pump-and-dump scams. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

OTC markets are sometimes cast as the seedy underbelly of the stock market. If the major exchanges are a mall, the OTC markets are a foreign bazaar. OTC markets offer the chance to find hidden gems, but also the potential to wind up stuck in a scam stock that you are unable to sell before it becomes worthless. But for investors willing to do the legwork, the OTC markets offer opportunities beyond the big exchanges.

Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. Usually, a trader has the OTC security, then it goes to a broker-dealer, and then the broker-dealer trades it to the person who’s buying it. The security’s price isn’t listed publicly as it would be on an exchange regulated by the Securities and Exchange Commission, says Brianne Soscia, a CFP from Wealth Consulting Group based in corporate finance Las Vegas. Stocks and bonds that trade on the OTC market are typically from smaller companies that don’t meet the requirements to be listed on a major exchange.

Like other OTC markets, due diligence is needed to avoid fraud endemic to parts of this trading world. Major U.S. indices declined to close lower on Wednesday as the markets headed into the Thanksgiving holiday. Banks, post offices, shipping services, stock markets and all the other over-the-counter markets xor neural network like bond markets will be closed on Thursday.