Over the Counter Stocks
Over the counter stocks are contracts that are bilateral and consist of contracts in which two parties agree on how a particular trade or agreement is to be settled in the future. These types of stocks, also known as “unlisted” stocks are traded over the counter typically because the company is small and unable to meet the listing requirements of the other major stock exchanges. Over the counter stocks are very risky stocks as well because there is no controlling body or organization such as the SEC to oversee the securities industry. Over the counter stocks also refer to stocks that trade through a dealer network instead of a centralized exchange and are traded by broker-dealers who negotiate directly win one another over computer networks and via the phone. Very few of these types of stocks are successful in moving from trading over the counter (OTC) or from the “pink sheets” to the NASDAQ or other major exchanges such as the American Stock Exchange or the New York Stock Exchange. It absolutely imperative to understand and be very cautious when trading over the counter stocks because the OTC Bulletin Board stocks are either penny stocks or they are stocks that hold bad credit records.
In the United States over the counter stocks are traded on the OTC Bulletin Board (OTCBB). The OTCBB was founded in 1990 and it is a regulated quotation services that exhibits real-time quotes, last-sale prices, and volume information for various types of equity securities. Bonds are also considered OTC securities because they don’t trade on a formal exchange. Most of these financial instruments are traded by investment banks that make markets for specific issues. Investors who would like to practice bond investing must call that bank that makes the market in that bond and must ask for a quote.
When discussing over the counter stocks, the concept of penny stock investing must be discussed as well. Many investors like to buy penny stocks because they require a pretty low investment and have the potential to more than double your investment in one to two days. Again, the only problem with investing in penny stocks is that these over the counter stocks are very risky because their price can drop drastically due to the potential low value of the companies that are listed on the OTCBB, otherwise known as the “pink sheets." It is tricky because many of the companies traded over the counter have limited financial history making it difficult to determine their actual value. Also, many of the companies are very new or they are extremely close to going bankrupt. If you are interested in trading over the counters stocks, you want to look for those companies that are possibly just starting out but that are making an honest effort to move from the OTCBB to a major stock exchange such as the NYSE. There is room for making a good return on investment when trading this type of stock, but you must be aware of the high risk factor when doing so.
Investing in over the counters stocks can be a great way to make money. Just remember that even though you are trading pennies, there is still potential to lose big when trading over the counter stocks.