OTC, OTCBB Stocks
What are OTC Stocks? Stocks traded on the over the counter market are often refered to OTC or OTCBB stocks. In the United States, this trading is done through OTCBB and Pink Sheets securities. The OTC market is not an organized marketplace or exchange. Any market in an equity security that is not listed on the NASDAQ Stock Market, AMEX, or NYSE, can be considered an OTC market which includes Pink Sheets.
Over-the-counter stock trading is carried out by market makers (a firm that quotes both a buy and a sell price) that make markets in Pink Sheets and OTCBB securities using inter-dealer quotation services such as Pink Quote and the OTCBB.
The OTC Bulletin Board (OTCBB), is an independently operated, regulated electronic quotation system that displays real-time quotes, last-sale prices, and volume information for many OTC equity securities. Similar to the Pink Sheets, OTC stocks are not actually listed or traded within a stock exchange. However, exchange listed stocks can be traded OTC. The OTCBB provides access to more than 3,300 securities and includes more than 230 participating Market Makers.
Unlike Pink Sheets, companies quoted on the OTCBB must be fully reporting (i.e. current with all required SEC filings), but aren’t regulated on market capitalization, minimum share price, corporate governance or other requirements to be quoted.
There are many investment opportunities for intelligent, informed, investors in the OTC market but it comes with a high degree of risk. Companies which have been “de-listed” from stock exchanges for falling below minimum capitalization, minimum share price or other requirements often end up being quoted on the OTCBB. Many OTC issuers are small companies that are economically distressed or have limited operating histories. Even investing in legitimate OTC companies can lead to complete loss of investment.
Another risk associated with OTC stocks is a form of fraud called “Pump and dump”. Pump & Dump is carried out through email spam or telemarketing in which the supposed hot stock is promoted to the victim. The person promoting the stock purchased it at a lower price and then sells it at a higher price after the promotion. Investors who purchase securities based on the “hot tip” will often be disappointed. Research has shown that the typical victimized investor sells his stock after 2 days, and loses 5.5%
It is advised that unsophisticated or passive investors should completely avoid the Pink Sheets or OTC markets.
Potential investors interested in investing in OTC stocks should:
1. Contact their broker or investment company and ask about OTC services. Some of the larger brokerages and investment banks offer OTC options.
2. Using the OTCBB, research the companies that you would like to invest in.
3. Buy shares as you would a normal company, or as instructed by your broker or financial institution
4. Track OTC shares more carefully than other stocks. Their performance may be volatile due to lower trading volume or manipulation. Ask your broker or financial institution about special fees or trading times for your OTC stock.
Investors should always be wary when investing in Pink Sheets and/or OTC markets. It is very important to research any company in which you wish to invest prior to making your first buy. Don’t believe everything you hear or read. If it sounds too good to be true, it probably is.