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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.
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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:
1. 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.
2. 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.
Take a look at our recommended brokers to get started.
Best For
1 Minute Review
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.
Best For
- Active traders
- Intermediate traders
- Advanced traders
Pros
- Commission-free trading in over 5,000 different stocks and ETFs
- No account maintenance fees or software platform fees
- No charges to open and maintain an account
- Leverage of 4:1 on margin trades made the same day and leverage of 2:1 on trades held overnight
- Intuitive trading platform with technical and fundamental analysis tools
Cons
- Does not support trading in mutual funds, bonds or OTC stocks
Best For
1 Minute Review
TradeStation is for advanced traders who need a comprehensive platform. The brokerage offers an impressive range of investable assets as frequent and professional traders appreciate its wide range of analysis tools. TradeStation’s app is also equally effective, offering full platform capabilities.
Best For
- Advanced traders
- Options and futures traders
- Active stock traders
Pros
- Comprehensive trading platform and professional-grade tools
- Wide range of tradable securities
- Fully-operational mobile app
Cons
- Confusing pricing structure to leave new traders with a weak understanding of what they pay
- Cluttered layout to make navigating TradeStation’s platform more difficult than it should be
Best For
1 Minute Review
This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.
Best For
- Novice investors
- Retirement savers
- Day traders
Pros
- World-class trading platforms
- Detailed research reports and Education Center
- Assets ranging from stocks and ETFs to derivatives like futures and options
Cons
- Thinkorswim can be overwhelming to inexperienced traders
- Derivatives trading more costly than some competitors
- Expensive margin rates
Best For
1 Minute Review
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.
Best For
- Cost-conscious traders
- Novice traders
- Active/Advanced traders
Pros
- Free Level 2 market data for all users who open an account
- Commission-free trading in over 5,000 different stocks and ETFs
- Over 8,000 different stocks that can be sold short
- $0 contract fee for trading options, no commission either
- Strong market data and analysis tools with over 50 technical indicators
- 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.
- Active trading community with more than 100,000 app users
Cons
- No phone or chat support
3. 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.
4. 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
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.
Turn to Webull
0 Commissions and no deposit minimums. Everyone gets smart tools for smart investing. Webull supports full extended hours trading, which includes full pre-market (4:00 AM - 9:30 AM ET) and after hours (4:00 PM - 8:00 PM ET) sessions. Webull Financial LLC is registered with and regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). It is also a member of the SIPC, which protects (up to $500,000, which includes a $250,000 limit for cash) against the loss of cash and securities held by a customer at a financially-troubled SIPC-member brokerage firm.
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Disclaimer: These stocks are not stock picks and are not recommendations to buy or sell a stock. Rather, these ideas should be viewed as potential opportunities for elevated levels of volatility and trader interest and thus increased liquidity. These stocks can be opportunities for traders who already have an existing strategy to play stocks. Benzinga does not recommend trading or investing in low-priced stocks if you haven’t had at least a couple of years of experience in the stock market. For a full statement of our disclaimers, please click here.