OTC Markets: What It Is, How to Trade It, & Pros and Cons

Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Although it’s easy to buy OTC stocks, the tougher question to answer is whether you should buy OTC stocks. Trade confidently with insights and alerts from analyst ratings, free reports and breaking news what is swing trading that affects the stocks you care about. Anthony, Linder & Cacomanolis, PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice.

Can Exchange-Traded Stocks Also Trade OTC?

When an OTC stock is listed on a major exchange, its trading environment improves. The stock becomes available for trading on the new exchange, attracting more investors, which may include institutions. Existing OTC shareholders retain their shares, but improved visibility and credibility can quickly drive up a stock’s value. Over-the-counter (OTC) stocks often trade in less regulated markets, but some companies aim to transition to major exchanges like NASDAQ or the NYSE.

• Penny stocks have always had a loyal following among investors who like getting a large number of shares for a small amount of money.
• FINRA’s responsibilities include monitoring trading activities, enforcing compliance, and handling disputes.
• This allows investors to diversify their portfolios and gain exposure to international markets and companies that may not be available through traditional exchanges.
• You come across an opportunity called “CoinDeal,” which promises exceptionally high returns on the premise that one or more technology companies under the “ViRSE” banner are about to be acquired by a group of wealthy investors.

Regulations of the Over-the-Counter Market

Some brokers may limit trading in certain OTC securities (such as “penny stocks”) or charge higher fees for these transactions. Suppose you manage a company looking to raise capital but don’t meet the stringent requirements to list on rfp software development a major stock exchange. Or you’re an investor seeking to trade more exotic securities not offered on the New York Stock Exchange (NYSE) or Nasdaq.

As a result, they often lack liquidity, which means you may not be able to find a willing buyer if you want to sell your shares. Because supply and demand may be out of sync, you’ll often find wide bid/ask spreads for OTC securities. Bankrate.com is an independent, advertising-supported publisher and comparison city index reviews service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products.

Types of OTC Securities

FINRA provides oversight for trading on the OTC market and issues trading symbols. It requires public companies to report splits, reverse splits, name changes, and mergers. If you place a market order with an OTC, you can wind up paying any price for the stock — and it likely won’t be in your favor. These days, in addition to providing quotation services, OTC Markets provides information. Its website has up-to-date information on news, volume, and price. In 1999, it became the first company to bring electronic quotation services to the OTC markets.

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These companies are unregulated and are often smaller, newer, and provide unsubstantiated data. They’re typically much less expensive to trade but they’re also riskier. You can buy and sell OTC stocks if you go with a real-world, full-service brokerage. The broker will place the order with the market maker for the stock you want to buy or sell.

Investors can buy and sell these securities as they would any other stock, and the broker-dealers provide liquidity by trading from their own brokerage accounts. The lack of transparency can leave OTC investors vulnerable to fraud. In a pump-and-dump scheme, for example, fraudsters spread false hype about a company to pump up its share prices, then offload them on unsuspecting investors. Investing in OTC securities is possible through many online discount brokers, which typically provide access to OTC markets. However, it’s essential to note that not all brokers offer the same level of access or support for OTC investments.

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In this article, we’ll examine what OTC markets are, how they differ from traditional stock exchanges, and the advantages and disadvantages for investors. We’ll explore the key OTC market types, the companies that tend to trade on them, and how these markets are evolving in today’s electronic trading environment. However, it has now been four years since the proposal with no action. Although the proposal remains on the SEC’s regulatory agenda, the responsive comments were overwhelmingly opposed to the change and over time, it is increasingly unlikely that the rule will be affected as proposed. A resolution of this cloud would also help ease institutional concerns with OTC Markets investments. The Over-the-Counter (OTC) Market is a decentralized marketplace where participants trade financial instruments directly with each other instead of through a centralized exchange.

Consider placing a limit order, due to the possibility of lower liquidity and wider spreads. Lower liquidity means the market may have fewer shares available to buy or sell, making the asset more difficult to trade. When there is a wider spread, there is a greater price difference between the highest offered purchase price (bid) and the lowest offered sale price (ask). Placing a limit order gives the trader more control over the execution price. There’s a possibility that there could be fraud at the very lowest level of the pink sheet market,” he says.