If you’ve been frustrated by the limitations of conventional stock exchanges, then perhaps the OTC markets might be for you. That’s probably why you’ve landed on this blog post – you’re among those looking to zag when everybody else is zigging.
But still, you’re left scratching your head. You don’t quite understand what OTC stocks are, and you have no idea how to buy OTC stocks easily.
Well below, we’ll run you through the basics – so let’s cut right to the chase, yes?
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The $50 Million Question: What are OTC Stocks?
In the simplest terms, OTC stocks are securities that don’t trade on conventional stock exchanges like the NASDAQ or NYSE. That might not sound so different from regular stocks, but there’s a world of difference between the two.
To start with, OTC stocks don’t meet the same stringent listing requirements as exchange-listed stocks. In actuality, there’s not that much difference between stocks on the OTCQB and OTCQX markets. The listing fees are lower than exchanges, as are the requirements for revenue. But like exchange-traded public entities, they still have to report to the SEC regularly.
Second, OTC stocks tend to be a lot cheaper than their exchange-listed counterparts. But because of this, many of these equities are attractive targets for pump-and-dumpers, as well as message board-fuelled mania (e.g., Wall Street Bets).
Lastly, OTC stocks don’t have close to the same analyst coverage that exchange-listed stocks get. Consequently, many buyers treat these equities like poker chips. However, if your research skills are on point, it is possible to find information on many OTC stocks (especially those in the OTCQX and OTCQB markets).
How to Purchase OTC Stocks: a Primer
Now it’s time to buy these equities – so how do you do it? In the past, it was a labor-intensive process, you had to pick up a phone, find a broker who was willing to deal in OTC stocks, and place your order.
Thankfully though, we live in the 21st century – now, buying OTC stocks is a breeze. Not only can you buy them over the internet, but now, most mainstream brokers allow OTC trades on their platforms.
But that’s enough preamble – here’s the quick and easy guide to buying OTC stocks:
1. Look for a broker that allows OTC trades
As we said, many brokers now allow OTC trades on their platforms. However, some don’t – so it’s important to do your due diligence and check before you open an account. Also, some charge unreasonable per-trade fees. Most brokers are moving to a zero-fee model, but there are a few holdouts.
2. Research the company
Just like with any other stock, you need to do your due diligence on the company before you buy. After all, you don’t want to end up being a bagholder when the next Enron comes along (and on the OTC exchanges, there are a LOT of Enrons).
3. Place your order
When you’ve found a company that you’re interested in and have done your research, place a buy limit order. This ensures that your order will go through at a price you’re willing to pay.
4. On selling
Once you’ve bought your preferred stock, you can hold it for a hot minute or years. But the day will come when you’ll want to cash out. When it arrives, place a limit sell order – this will ensure you get a price that’s agreeable to you.
Read more: How do I Learn What Stocks to Buy and Sell?
Be Aware of the Risks of Investing in OTC Stocks
We’ve alluded to the dangers of OTC trading throughout this article, but we’ll end it by underlining this point.
As we said before, OTC stocks don’t have to meet the exact stringent listing requirements as exchange-listed stocks. That might not sound like a big deal – but it opens the door for pump-and-dump schemes.
Even when scams aren’t occurring, OTC markets are far less liquid than exchanges. This reality means that it can be difficult to unload large positions when a crash suddenly happens.
So, be cautious, friends. Never invest money you can’t afford to lose. With that said, we hope your forthcoming trades bring you profitable returns!