Over the Counter Stocks (OTC stocks) are financial instruments that are traded directly between two parties. Over the counter trading of stocks is differentiated from exchange trading in several ways.
Exchange trading occurs in corporate-owned or mutual organization-owned facilities called stock exchanges, while OTC stocks are traded directly between two celebrations. OTC stocks are not traded in the stock exchanges, but there are inter-dealer stock quotation services that help facilitate such trades.
OTC stocks trading is carried out by market makers that are found in the Over The Counter Bulletin Board (OTCBB), and/or the Pink Sheets. Market makers literally make markets for particular OTC stocks at these inter-dealer stock quotation services. The market makers give the price quotes for the stocks, and do both the buying from and selling to their clients.
Market makers make money from OTC stocks by profiting from the turn, or difference, in the bid/offer spread. The client’s loss and the spread are the market maker’s profit centers, and in this regard the market maker acts much like a stock exchange’s securities specialist.
The market maker is compensated for providing liquidity in a highly competitive market this liquidity at the very least reduces transaction costs between the beneficial buyers and beneficial sellers of the OTC stocks. The liquidity provided by over the counter market maker facilitates trades for these clients, who would most possibly have to accept a worse price for their stock, or at worst not be able to trade the stock at all.
There are currently over 5000 OTC stocks that can be found in the Over The Counter Bulletin Board and the Pink Sheets. Most of these OTC stocks over 3000 such stocks are quoted at both the OTCBB and the Pink Sheets, with a tiny over a hundred stocks quoted exclusively at the OTCBB, and the rest of the stocks quoted exclusively on Pink Sheets.
The parent companies of OTC stocks quoted in the Over the Counter Bulletin Board have complied with the U.S. Securities and Exchange Commission’s disclosure and reporting stipulations.
The companies whose OTC stocks are quoted in the Pink Sheets have no third celebration reporting or registration that will allow them to be listed at the OTCBB. The Pink Sheets, however, has its own tiered system designed to help potential OTC counter stock investors choose companies that have provided some form of financial and corporate disclosures to the Pink OTC Markets, the current operator of the Pink Sheets.
Trading in OTC stocks provides investment opportunities for well-informed investors, yet offer a high degree of risk compared to stocks traded at stock exchanges. A sizable number of OTC stocks are issued by startup companies with tiny operating history, if there’s an operating history at all. Many companies in financial distress have also issued OTC stocks in order to raise operating funds.
With limited or practically no registration requirements to issue and trade stocks, there are companies that specialize in fraud operations using OTC stocks. Legitimate OTC stocks are also used by unscrupulous stock traders for various forms of stock fraud and stock manipulation.
People who would like to invest in OTC stocks are advised to be well informed before purchasing any such stocks. At the very least, do the appropriate due diligence and company research on the OTC stock you’re thinking of buying. Company fundamentals and history are very important, as well as any financial information available. OTC stocks trading is a high-risk activity, but could yield high profits for the well-informed investor.
About the Author
Nir Dotan is a writer and promoter of
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