How to Buy Over-the-Counter Stocks

Over-the-Counter Stocks Defined

Small companies that cannot meet the requirements to trade on the larger markets tend to sell over-the-counter (OTC) stocks. Rather than selling shares on larger stock exchanges like the New York Stock Exchange and Nasdaq Stock Market, they can sell them directly through dealers and brokers. Stocks on traditional exchanges are called listed stocks, and ones that trade through OTC market are called unlisted stocks.

How OTC Stocks Work

The OTC consists of three tiers of more than 10,000 securities and a volume that’s worth over $1 billion. Here is what each tier of the OTC market entails:

  • The OTCQX Best Market: In the highest tier, companies must meet a high level of financial requirements, reporting standards, and accounting. Over 400 companies are in this tier.
  • The OTCQB Venture Market: This is the second tier of the OTC market. Although the requirements are less than the highest tier, companies still need to get listed on a qualified international stock exchange and report to a U.S. regulator.
  • The Pink Open Market: This is the lowest tier of the OTC. Investors find this tier challenging since companies do not have to meet any financial standards and provide little information.

How to Buy OTC Stocks

If you decide that OTC stocks are the right investment for you, there are a few things you must do before making your first purchase. Buying stocks isn’t as simple as going to the store. When you’re ready to start trading OTC stocks, follow these steps:

  1. Open an account with a brokerage firm. When choosing an online brokerage firm, you may come across companies like TradeStation, Zacks Trade, and Robinhood. When choosing a real-world full-service firm, the broker takes care of placing your order with the market maker.
  2. Monitor bid quotes. A bid is an offer made by a dealer, investor, or trader. You can keep an eye on them through the Over-the-Counter Bulletin Board (OTCBB).
  3. Talk to your broker. When you find an OTC stock you wish to purchase, ask your broker to place the order.

The Benefits and Challenges of OTC Stocks

With every type of trading comes a potential risk and reward. That’s why you need to do plenty of research prior to investing in an OTC stock.

The benefits of OTC stocks include the following:

  • You can invest in low-cost stocks and see a significant return.
  • Lower restrictions allow many companies to enter the OTC marketplace.
  • You get access to securities that aren’t on standard exchanges.

The challenges of OTC stocks include the following:

  • Many companies choose to restrict how much information they share, making it difficult to make smart investments.
  • OTC stocks tend to change rapidly based on economic and market data.
  • There is more chance of fraud due to fewer regulations and outdated information.

As you can see, there is more to OTC stocks than meets the eye. When you learn how to properly trade them, you may find they lead to exciting opportunities.