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Many companies that offer exceptional value are still starting out and can be found on the over the counter (OTC) market.
Buying or selling stocks OTC is different than trading stock on the New York Stock Exchange or the NASDAQ. Learn more about the OTC market and how you can starting trading with our review.
Contents
What are OTC Stocks?
OTC stocks are generally too small to meet the requirements needed to list on the major exchanges. These stocks are traded by broker-dealers that negotiate directly between 1 another through computer networks or over the phone.
These stocks are normally still governed by the Financial Industry Regulatory Authority (FINRA).
OTCs at a Glance
The OTC network isn’t limited to stocks. It encompasses any financial instruments that aren’t directly traded through a central exchange, including stocks, bonds and derivatives.
Some major differences between the OTC exchange and major exchanges include:
- Transaction transparency, which means you may be limited on what bids and offers you can see based on your broker, rather than seeing all orders available, including markups on foreign exchange stocks.
- On major exchanges, every party receives offers from every counterparty. This doesn’t always occur on the dealer exchange and can create information disparity.
- OTC exchanges have fewer rules and regulations than centralized exchanges. This leads to higher competition between the providers to get more volume for their firms, which results in lower transaction costs.
- Stocks found on the OTC market are often penny stocks with prices as low as $0.05 to $0.10. Coupled with large spreads, you can end up buying a stock at the $0.10 ask price, and it can immediately trade to the $0.05 bid price and lose 50% of its value.
Pros and Cons of OTC Stocks
OTC stocks have some distinct advantages and disadvantages to the centralized exchange-traded stocks:
Pros of OTC stocks
- OTC stocks allow you to trade companies that not only don’t list on major exchanges but also shares of companies in foreign markets.
- Transaction costs can be much lower on the OTC networks.
- Given the smaller size of companies, your investments will give you a much larger stake in a company.
Cons of OTC stocks
- The lack of liquidity can leave you with stocks that are hard if not impossible to sell.
- Companies listed on the OTC exchange may provide less accounting information than the regular exchanges.
- Stocks that generally trade on the OTC do so because they have bad credit, don’t make much money or are just starting out, which makes them fairly risky
How to Purchase OTC Stocks
If you’re interested in purchasing shares of a company that trades on the OTC market, follow these steps:
- Determine how much you want to invest
OTC stocks are inherently riskier than those traded over the regular exchanges. Treat these stocks as speculative and size your positions appropriately. Don’t invest money you’re not willing to lose.
- Find an appropriate broker
Many of the major brokerage firms that you use for regular stock trading allow for the trading of OTC stocks. Fees can vary for OTC versus regular stocks, so make sure you understand what the costs are relative to normal trading.
- Decide where to buy your stocks
When you look into OTC stocks, there are several places you might find them. The Best Market (OTCQX) houses stocks with large market caps, high liquidity and solid backing. The Venture Market often carries stocks from startups or companies in the development phase. The Pink Open Market and grey sheets could contain shell corporations, businesses enduring a bankruptcy or companies delinquent on filings/under investigation. Limiting your search to the Best and Venture Markets is safer, especially for novice investors.
- Fund your account
Many of the major brokerages allow you to trade the OTC market. You’ll need to check whether you would be eligible to trade on OTC markets with your broker.
- Purchase your OTC stock
While it’s fairly easy to purchase stocks on the major exchanges, it may take a bit more to understand how to execute a trade on the OTC markets. Consult customer service for your broker-dealer to understand how to execute an OTC trade through its specific platform.
When you place an order, you’ll have an option for market orders or limit orders. With a lower liquidity, the spreads can be much wider than on normal exchanges.
Your broker-dealer has a few options when handling your order. It’s possible to fill the order internally by matching clients within the brokerage. Otherwise, brokers can send the quote out to the OTC market to make the trade with another broker-dealer.
If an order is not marketable, the broker-dealer may need to change the existing quote to reflect the new price or size
Recommended Stock Brokers
Take a look at our recommended brokers to get started.
Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.
Webull is widely considered one of the best Robinhood alternatives.
- Active traders
- Intermediate traders
- Advanced traders
- No account maintenance fees or software platform fees
- No charges to open and maintain an account
- Intuitive trading platform with technical and fundamental analysis tools
- Does not support trading in mutual funds, bonds or OTC stocks
Moomoo is a commission-free mobile trading app available on Apple, Google and Windows devices. A subsidiary of Futu Holdings Ltd., it’s backed by venture capital affiliates of Matrix, Sequoia, and Tencent (NASDAQ: FUTU). Securities offered by Futu Inc., regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Moomoo is another great alternative for Robinhood. This is an outstanding trading platform if you want to dive deep into smart trading. It offers impressive trading tools and opportunities for both new and advanced traders, including advanced charting, pre and post-market trading, international trading, research and analysis tools, and most popular of all, free Level 2 quotes.
Get started right away by downloading Moomoo to your phone, tablet or another mobile device.
- Cost-conscious traders
- Active and Advanced traders
- Over 8,000 different stocks that can be sold short
- Access trading and quotes in pre-market (4 a.m. to 9:30 a.m. ET) and post-market hours (4 p.m. to 8 p.m. ET)
- No minimum deposit to open an account.
- No chat support
This latest groundbreaking technology is IBKR GlobalAnalyst, a new trading tool that helps investors compare the rate of PEG or price-earnings growth valuations and provide more immediate and comprehensive financial metrics of stocks, globally.
Recognizing that stock selection can be challenging for investors to compare the valuations of domestic and international stocks, Interactive Brokers created GlobalAnalyst to offer investors a simple, yet powerful tool to easily evaluate investment opportunities around the world.
Using GlobalAnalyst, investors can search for stocks by region, country, industry, market capitalization and currency to uncover undervalued stocks worldwide. The resulting table displays the current market and financial metrics, including the PEG Ratio. The PEG Ratio is the PE ratio divided by the three-year compound earnings growth rate, and smaller PEG Ratios typically indicate undervalued companies.
- Price earnings growth valuations
- Easily evaluate investment opportunities
CenterPoint Securities is ideal for active traders who demand access to advanced tools and services. While investors and casual traders are likely to be content with the basic offerings of traditional online brokerages, active traders will benefit from CenterPoint’s suite of advanced trading tools. If you value execution quality, access to short inventory, advanced trading platforms, and accessible customer service, CenterPoint is an excellent choice.
- Intermediate to Advanced traders
- High-volume traders
- Momentum traders
- Short sellers
- Unrivaled access to short inventory
- Flexible order routing for improved executions
- Discounts for active traders
- Advanced platform with fast executions
- Reliable customer service
- Not designed for beginner or low-volume traders
Get Started in OTC
Investments in OTC companies should be treated as highly speculative. Don’t make OTC stocks a core component of your portfolio.
Be sure to visit the FINRA website to research and prepare for what to expect trading on the OTC markets.
Frequently Asked Questions
How do I buy OTC stocks?
The best approach is to work with a dependable broker They specialize in these stocks and can guide you.
Is it challenging to sell OTC stocks?
OTC stocks are not as liquid and make it difficult to get the prices you want.