There are over 10,000 different securities from 100 countries that trade on the three tiers of OTC Markets.

We use the term “security” as a catch-all because it can refer to a variety of financial instruments. Even though all these instruments give investors some amount of ownership or rights in a company, they do have key differences, and it’s important that anybody investing in securities understand the nuances that differentiate them. For example, most of the securities below are commonly traded on both exchanges and OTC Markets, though there are a couple of exceptions.

These are the six most common types of securities you’ll find on OTC Markets.

Common Stock

These are the most common type of security, as the vast majority of publicly traded shares are common stocks.

Common stocks typically carry one vote per share—allowing owners the right to participate in shareholder votes—and may also come with a dividend. Smith-Midland Corp (OTCQX:SMID) is an example of a common stock.

Preferred Stock

The biggest difference between preferred stocks and common stocks is that owners of preferred shares are higher up the equity food chain. Preferred shareholders have a priority claim over a company’s equity, meaning they generally receive higher or more dividends and get paid out first in the event of a bankruptcy. Because of this, preferred shares behave similarly to bonds.

Preferred stocks also do not come with voting rights, and their tickers will end in ‘P’ to make it obvious that they are preferreds. Meritage Hospitality Group, Inc. is an example of a company that has both a common stock (OTCQX:MHGU) as well as a preferred stock (OTCQX:MHGUP).

ADR / ADS

American Depositary Receipts (ADRs) or American Depositary Shares (ADSs) allow for foreign companies to have their shares publicly traded in the U.S. and settled in U.S. dollars. The idea is that this gives U.S. investors access to the shares of a foreign company in a way that makes them look and feel like U.S. securities. As a result, ADR shareholders can get access to a foreign company’s dividends and capital gains without having to go directly to an overseas exchange.
American Depositary Receipts are created by depositary banks. These banks can create sponsored ADRs, meaning there’s a formal agreement between the company and the issuing depositary bank, or unsponsored ADRs with no formal agreement. Some ADRs, particularly the unsponsored kind, may not carry voting rights. ADRs may come with fees assessed by the depositary bank.

Just like how preferred symbols will end in ‘P’, ADR symbols on OTC Markets end in ‘Y’ to alert shareholders that they are an ADR.

Heineken NV ADR (OTCQX:HEINY) and Experian PLC ADR (OTCQX:EXPGY) are two examples of ADRs.

Foreign Ordinary Shares

Foreign ordinary shares are common shares of a foreign company that trade in the U.S. In other words, they are securities bought by U.S. investors in foreign companies directly - without the ADR “wrapper.”

Foreign ordinary shares are similar to ADRs in that they provide exposure to foreign companies. The biggest difference however is that, even though U.S. investors can trade them via OTC Markets, foreign ordinary shares are settled and custodized on the company’s home market. As dividends get paid in foreign currency, they will require the investor to convert to USD.

The tickers for foreign ordinary shares end in ‘F’, such as Air Canada (OTCQX:ACDVF). In many cases, a company will have both an ADR and an F share trading on OTC Markets, for example, BASF SE (OTCQX:BASFY) (OTCQX:BFFAF).

Unit

A unit is an individual share of some sort of structured investment, typically a fund or trust. Real Estate Investment Trusts (REITs) are commonly broken down into units, the shares of the REIT that can be traded.

American Hotel Income Properties (OTCQX:AHOTF) is a REIT, and an example of an investment whose securities are defined as units.

Warrant

A warrant is similar to an option, in that it gives the owner the right to buy a company’s underlying stock at a fixed price during a specific time period.

The biggest difference is, unlike options, companies issue their own warrants, so when the holder of a warrant exercises their right to buy or sell, the shares are coming directly from the company. Warrants can trade on an exchange, but also commonly trade on OTC Markets.

Symbols for warrants end in ‘W’. Tidewater Inc. (OTCQX:TDGMW) is an example of a security structured as a warrant.

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Tuesday, August 13, 2019