Home Investment Trade Stocks that Aren’t On Major Stocks Exchanges

Trade Stocks that Aren’t On Major Stocks Exchanges

by admin
Advertising Disclosure This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services

When investing or trading, many people first think of the major stock exchanges. Although exchanges like the New York Stock Exchange and the Nasdaq are popular and easy to access through a broker, there are other ways to buy and sell stocks. An over-the-counter market is one that offers various securities without a third party. In some cases, these types of transactions can come with enhanced risk. If you’re interested in learning more about over-the-counter market trading, here’s what you need to know.

What Is an Over-the-Counter (OTC) Market?

OTC markets are places where it’s theoretically possible to complete transactions between two parties. However, in practice, there are now exchanges that handle many over-the-counter market transactions.

What makes OTC markets a little different is that it’s possible for two parties to come to an agreement about price and complete a transaction without others seeing the details. Dealers on the OTC market can set their prices and make deals in a way that is different from a major exchange, where third parties are involved and prices are publicly listed.

It’s worth noting that the bonds, stocks and currencies typically sold through an over-the-counter market are usually less liquid. OTC exchanges are generally less regulated than major exchanges.

What Types of Investing Does OTC Focus On?

There are different exchanges that list stocks, as well as those where you can buy bonds and currencies. However, you’re most likely to find stocks that aren’t listed on major exchanges like the New York Stock Exchange (NYSE) or the Nasdaq.

A variety of stocks are listed over-the-counter.

  • Some international stocks, like Nestle, aren’t listed on major U.S. exchanges but can be traded on OTC markets.
  • Other stocks, like those related to cannabis, can’t be listed on major U.S. exchanges for legal reasons and are available OTC.
  • Finally, stocks investments that don’t meet regulatory requirements or the minimum requirements to be listed on a public exchange can be traded on OTC markets.

There are other financial products on the OTC markets. You can sometimes buy bonds and currencies, as well as American depository receipts. If someone is willing to sell it and find buyers, it can be traded on some type of OTC market.

Examples of Over-the-Counter Securities

NestleAs mentioned, Nestle is one example of a security that trades over-the-counter. It’s a foreign stock listed on the Swiss exchange, but it doesn’t trade on a major U.S. exchange. Another example is Planet 13 Holdings, which focuses on cannabis and can’t trade on a major exchange as long as marijuana is illegal at the federal level. Other examples of stocks that trade in the OTC markets include:

  • Allianz
  • Roche Holding
  • Bayer
  • Danone
  • BAE Systems
  • Softbank
  • Tencent

What Exchanges List Over-the-Counter Stocks?

If you’re specifically looking for stocks, there are three main exchanges that offer OTC markets for investors and traders.

  • OTCQX — This is a more selective exchange. These are often stocks that aren’t listed on major U.S. exchanges but have a goal to get there eventually. Additionally, this is the exchange where you’re most likely to find foreign stocks that are listed in their own countries, but not on major U.S. exchanges.
  • OTCQB — If you’re looking to get in on the ground floor with a hot startup, this might be one place to look. Companies on this exchange are often hoping to develop into major players, but are still at an early phase in development. While there are some reporting requirements in this over-the-counter market, the oversight isn’t as stringent as what you’d see with the OTCQX.
  • Pink Sheets — There is almost no regulation when you go to the pink sheets. The companies trading here don’t register with the Securities and Exchange Commission (SEC) and they don’t have to provide any reports or financials. As a result, this is where many of the “pump and dump” scams you hear about take place.

How to Buy OTC Stocks

If you decide you want to purchase OTC stocks, it’s fairly easy to do. Most online brokers can help you buy these stocks, so if you have a traditional brokerage account, it should be doable. If you don’t have a broker account, you’ll need to set one up. Not all brokers let you trade OTC stock, so double-check before you open an account. Interactive Brokers and Zacks Trade are two brokers that do allow you to trade OTC stock.

Next, you’ll need to fund your account and decide how much you want to invest. Like any investment, investing in OTC stock is risky, so only invest a small portion of your portfolio.

Buying and selling on the OTC market isn’t the same as trading stock on major exchanges. Your broker might have a specific way to trade on their platform, so be sure to ask them about it first. Regardless of how the trade is done, you’ll need to know the ticker symbol, including the exchange a stock is on. You can find out information about the stock you’re considering on most stock screeners, as well as the OTC Markets website, which is the marketplace where most U.S. securities are traded.

When you place an order, your broker usually has a few options.

  1. They can fill the order internally by matching your ask with other clients within the brokerage who are looking to buy.
  2. Or they can send your order to the OTC market to trade with another broker-dealer.
  3. If there are no matches, your broker may need to change the order to reflect a new price or size.
  4. Once the quote is met, the order will go through and you’ll see the shares in your account (or money, if you sold your shares).

Risks of OTC Markets

There are a number of risks related to trading in an over-the-counter market. Some things to be aware of include:

cons

  • Lower liquidity: This means you might not be able to trade in real-time, and there can be delays. In some cases, you might not be able to sell the stock later.
  • Less accurate: Without the same level of regulation, you might not be able to get access to accurate information about various assets.
  • Higher chance of fraud: There’s a high possibility of fraud due to a lack of regulation and transparency.
  • Volatility: Many OTC stocks are highly volatile. Market data can mean huge swings in prices.
  • Market manipulation: OTC stocks are potentially subject to greater degrees of manipulation. For example, Reddit users can easily provide information that leads to an increase in price. Those who are in early can dump their shares as others get excited. They make money, but later investors end up with losses.

Benefits of OTC Markets

While you need to be careful with OTC markets, there are also benefits involved when trading stocks on an over-the-counter market.

pros

  • Greater access: You can get access to financial products not available on regular exchanges, such as bonds and American depository receipts.
  • Ability to buy other types of stock: You can trade stocks not available on U.S. exchanges, including foreign stocks and smaller company and start-up stocks.
  • More open due to less regulation: Fewer regulations can lead to more open trade.
  • Lower costs. Because these stocks often cost much less, it’s possible to buy large amounts and earn significant returns when the prices rise.

Real-Life Example of OTC Trading

Let’s say you want to buy shares of an up-and-coming biotech company for $0.05 each. You buy 10,000 shares for $500. You read a rumor that this company has a more effective vaccine in the works for COVID-19 and the price skyrockets to $0.15. If you sell all your shares, you end up with $1,500, logging a gain of $1,000.

On the other hand, maybe you have a stock in your investment portfolio. You’ve been sitting on 50,000 shares of it for a couple of months. When you go to sell, though, you find out that there’s only a market for people to buy 8,000 shares and there are even more still for sale. You’ll have to take a loss — unless you get lucky later.

There are some OTC stocks that haven’t traded for more than a month, and they can be hard to unload when you want to get rid of them.

Bottom Line

The OTC markets offer a chance to make some quick cash and trade stocks that you might not have access to otherwise. However, you need to be careful when trading on an over-the-counter market. With lower liquidity and transparency in many cases, you could lose much more than you make. Carefully consider your position, and only invest money you can afford to lose.

related posts

Leave a Comment