Trading stocks has become an increased focus in recent years, particularly attractive to those already holding a full-time job but seeking a side-income or those hoping to find a source of passive income. For the highly dedicated, it can even become a primary source of income allowing liberty for other endeavors. However, for some, purchasing a large amount of stocks on the traditional market may be out of reach. It is important to consider all options when investing and one option for many is the OTC market.
What are OTC stocks?
OTC stocks, or "over-the-counter" stocks, are stocks that are typically cheaper and trade outside the traditional exchange of the New York Stock Exchange (NYSE) and NASDAQ. These stocks are called "unlisted" and the securities are traded through a broker-dealer direct exchange rather than a centralized exchange. These exchanges can take place on an assortment of electronic platforms, all monitored and regulated by the Financial Industry Regulatory Authority (FINRA). FINRA is a government authorized non-profit organization dedicated to protecting investors and safeguarding the market integrity.
Unique characteristics
OTC stocks are highly attractive to some investors because of the low initial investment needed to buy larger amounts. Typically, these stocks are less than five dollars, and in some cases, less than one dollar. OTC stocks provide the opportunity to increase profits with little investment, but you must do your research on your purchase first. As indicated before, there are direct contracts between parties through brokers, and OTC markets are less transparent as there is very little information made public about recently agreed contracts.OTC stocks are often illiquid, which makes the buying and selling of them more difficult without affecting the price. Additionally, credit risk must be considered. Although there is a risk involved because OTC stocks are often volatile and quick moving based on market data, there is the potential to make profits with some observation and planning.
Benefit to investors
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Kinds of OTC stocks and ways to invest
Although stocks for OTC companies are not listed on the exchange, there are quite a few to be considered, especially for those new to stock trading. Small companies are often listed here, often because they don't meet qualifications to be listed on NYSE or NASDAQ. Additionally, they may opt-out of releasing certain information excluding them from the listing. However, other larger securities can also be traded OTC. American Depository Receipts (ADRs), stocks of foreign companies that are traded in the US are found OTC. You will also find bonds traded on the OTC as banks save on the listing fees for NYSE and NASDAQ which run anywhere from 50,000 dollars to 500,000 dollars plus additional annual fees.
Specifically for those just starting out, penny stocks, so-called because they are often sold for less than a dollar, are another OTC option for some. With research and guidance, penny stocks can turn a profit providing you are buying the right stock, at the right time, for the right price, and selling before any monetary loss.
It is possible to succeed with OTC stocks. Being aware of the market, doing some careful research about your options, and having patience will guarantee you learn all you can to get started with OTC stocks.
