Here is where the over-the-counter (OTC) market comes into the picture, which differs from the traditional stock market. This article will discuss the OTC market and the possibility of making more money than on the traditional stock exchanges.
You have probably heard about IPOs – when a large company enters the exchange. Investors try to buy its stocks at that moment. However, this is not the earliest stage of investing in a company. The stores can already be purchased and sold before entering the exchange.
What is the OTC Market?
OTC (Over-the-Counter) investing includes buying securities not registered officially on an exchange, such as the New York Stock Exchange (NYSE). As a result, such stocks do not comply with the placement rules on a stock exchange.
The OTCBB is an electronic service of quotes and trades that facilitates higher liquidity and better exchange of information. In turn, Pink Sheets is a private company that works with broker-dealers to prepare the stocks of small companies for the IPO.
What are OTC Stocks?
The main difference is that such securities are not traded on a regular exchange. As a rule, the company’s market capitalisation is below 50 million USD, and its shares cost less than 1 USD per stock (also called Penny Stocks).
In this scenario, the low prices allow a private investor to buy many shares for minimal invested capital. And if the company produces a high-quality product and becomes successful, the investor may increase their initial asset multiple times.
Main Types of OTC Market
More and more stocks seem on the OTC market every day. Trades are approved automatically via the telecom system. A severe drawback here is the possibility of stock market handling with multiple fraud schemes.
It is said that SEC, the adaptable organisation on safeties and exchanges, has a negative attitude towards the OTC market. For the investor to better evaluate the company’s transparency and growth potential, a system of categories helps assess the risks.
Best Market (OTCQX) is the most significant category. The stock value in OTCQX is never below 5 USD. A price below this verge might reveal a fraud company or one on the brink of bankruptcy.
Venture Market (OTCQB) – to fulfil this category, the business must give the SEC a complete account of its finances. The company remains in the classification if the regulator’s requirements are fulfilled. However, it is transferred to the Pink Open Market as soon as it breaks them.
The Pink Open Market features a whole variety of businesses that do not comply with the requirements of the SEC. As a result, their stocks can be bought very cheaply, but the risk of fraud is high.
The Peculiarities of Trading OTC Stocks
OTC trading is an alternative for small businesses. Entering a regulated argument may be laborious and complicated for the company, while placement on the OTC allows for attracting capital quickly. The requirements of OTC platforms differ meaningfully, and it can sometimes be difficult for an investor to find financial information about the company. While the trading volume is lower here, the stocks are traded much cheaper than their actual value, which is how you can profit.
Remember that OTC stocks have less fluidity due to their low demand. It means that trading OTC stocks may be happening with lags, and the difference between the buying and selling price may change significantly due to the market situation.
In addition, there is a high likelihood of fraud because the company does not report on its financial accounts. On the other hand, there might be considerably volatile movements at the instants of publication of specific economic data.
Most regulated securities with good growth potential and accurate financial records cost over 15 USD per stock. As a rule, such stores are traded on NYSE or NASDAQ.
However, OTC shares are traded below 1 USD per stock, and most of the financial accounts of such corporations are unavailable – therefore, procurement of such assets is always risky.
Nevertheless, if you only have a small quantity in your deposit account, you may risk and invest. For example, not every private investor can purchase 100 Apple stocks at 275 USD per stock.
Still, they can always afford to buy 1000 OTC stocks costing 0.1 USD, which, in the end, may bring more considerable revenue than pricy stocks of leading companies.
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