OTC Stocks – What to consider before investing

OTC stocks or over-the-counter stocks are not listed on the major U.S stock exchanges such as the Nasdaq or the New York Stock Exchange (NYSE). The OTC system includes OTC Bulletin Board (OTCBB ) and OTC Markets. The OTCBB is regulated by the Financial Industry Regulatory Authority (FINRA) while OTC Markets are run by a privately owned company. According to the OTC Market data, over 12,800 OTC securities are listed in 3 OTC markets including OTCQX, OTCQB and Pink market. 

What to consider before investing in OTC stocks?

Investing in OTC stocks may give you an opportunity for early investment in stocks that are not large enough to be traded on the Nasdaq or the NYSE. You may also use OTC to buy foreign stocks that are not traded on the U.S stock exchanges. An early investment in good stocks may turn into a great return. However, you should consider the risks of OTC stock investment. 

Public information

Unlike stocks listed on the U.S stock exchange that have to be registered with the Security Exchange Commission (SEC), the OTC stocks may not be registered with the SEC. Therefore, It may be hard for investors to obtain the company’s financial information. 

If a company’s OTC stocks are not registered with the SEC, they are not subject to the SEC filing requirements. For instance, those companies do not provide financial information to the OTC market. However, the SEC regulations require these OTC stock companies to provide corporate events such as dividends, stock splits, reverse stock splits, changes of name, mergers or acquisition, dilution or bankruptcy. You can check if the stock of a company is registered with the SEC.

Volatility

Stocks with high volatility will change their price sharply in a short period of time. When investing in OTC stocks, investors may experience high volatility. OTC stock prices may go up and down without any specific information. Also, OTC stock prices can be affected by stock manipulators who own a large number of shares. These stock manipulators can cause a significant drop in stock prices when they take advantage of high prices and sell their large number of shares. 

Liquidity

OTC stocks are not traded on the major US stock exchanges such as the Nasdaq or the NYSE. In addition, lack of information causes many investors not to invest in OTC stocks. As a result,  OTC stocks may be less liquid or traded in a low volume compared to stocks traded on the US stock exchanges like NYSE and NASDAQ. Investors generally see a wider gap of ask prices and bid prices for trading OTC stocks. 

Risks of fraud

As an OTC stock investor, you should be aware of the potential risks of fraud. OTC stock trading may involve “pump and dump” schemes. “Pump and dump happens when stock promoters spread false information  about a company in order to pump up the stock prices.Then, they take the advantage of artificially high prices of stocks and sell their shares quickly. As a result, the stock prices may drop significantly.   

How to invest in OTC stocks

OTC stocks are not traded on the Nasdaq or the NYSE. So, you may not be able to buy and sell OTC securities on some trading platforms such as Robinhood or Webull. However, you may be able to trade them on other platforms such as Fidelity, Charles Swabs, Merrill Edge and Etrade.    

You should check information about specific OTC stocks and do a lot of research before investing. Always do research before investing. Be highly careful with stock manipulators or promoters who mislead with false information. In addition, you can check if a stock is suspended from the SEC stock suspension list. You can get OTC stock information and help from OTC brokers via OTCBB or OTC Markets. However, you will have to pay for brokers’ fees. 

Questions and answers – OTC Stocks – What to consider before investing

1. Can exchange traded funds (ETFs) and Mutual funds invest in OTC stocks?

ETFs and Mutual funds cannot invest in OTC stocks due to the high level of risk involved in the investment of OTC stocks. 

2.  Are there other OTC securities?

Beside OTC stocks, investors can trade in other OTC securities such as  OTC debt instruments or OTC derivatives. Those OTC securities are quoted on the OTCBB, OTC Markets. On the other hand, other OTC securities (gray securities) are not quoted on either OTCBB or OTC Market. You can find information on all OTCBB securities from the OTCBB list. You can check out OTC security data from the OTC Markets’ security data. 

3. Is it more risky to invest in OTC securities than to invest in other stocks?

All investments carry risks. Investing in OTC securities may be highly risky due to the lack of public information and risk of fraud. However, OTC stocks still attract investors. An early investment in good stocks may turn into a great return. You should always do a lot of research and consider the risks of OTC stock investment before making any investment decision. 

4. What are the reasons for a company’s securities to be quoted on the OTC trading market?

Some companies do not meet the minimum requirement to be listed on the Nasdaq or the NYSE. Or they are delisted for some reason. For instance, when a company’s stock price closes under $1 for 30 continuous trading days on the NYSE, it may be subject to the delisting process from the NYSE.  On the other hand, some companies may choose to be listed on the OTC trading market to avoid the complicated filing requirements and save costs on the initial public offering (IPO).