What are OTC Stocks?

Malcolm Tatum

Over the counter or OTC stocks are stock options that are not listed on any stock exchange and must be purchased through a different medium. Various mechanisms are utilized in different countries to allow trading of over the counter shares that is orderly and very similar to processes used to trade shares on an exchange. Investors wishing to consider over the counter shares often consult what is known as pink sheets, or listings of investment opportunities that are not traded on exchanges. In some nations, there is some type of nationally recognized OTC bulletin board that provides continually updated information on any stocks that are not currently traded on an exchange.

Most "over the counter" stocks are issued by companies without a history of trading on the stock exchange.
Most "over the counter" stocks are issued by companies without a history of trading on the stock exchange.

Many OTC stocks are issued by smaller companies that are relatively new or for some reason have chosen to not trade on an exchange. Investors may focus some attention on these shares, simply because they are more likely to be overlooked by other investors who never get around to evaluating unlisted stock offerings. In some cases, companies issuing OTC stocks are simply waiting for a time when it will be possible to trade the shares on an exchange, while other companies prefer to continue trading over the counter for the long-term.

In years past, trading OTC stocks through some sort of dealer network meant observing a few limitations that were not placed on shares traded through exchanges. One important limitation had to do with buying on margin. Regulations in place in a number of nations did not provide for margin trading on OTC stocks, with various reasons cited. This began to change during the latter part of the 1990’s as many nations amended trading regulations to allow OTC stocks to be purchased on margin, assuming the investor met the basic criteria established by the dealer to be granted this privilege.

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It is important to note the OTC stocks are just as capable of generating returns as any shares traded on an exchange. The stock options traded through a dealer network carry the same range of volatility as any other options, and have the same potential to earn profits for stockholders. This means that the same basic techniques used to evaluate, buy, and sell shares holds just as true for OTC stocks as any exchange traded shares.

Choosing to invest in OTC stocks involves assessing the past performance of the shares, the current status of the options, and accurately projecting what will happen with the unit price of those shares in the future. At the same time, investors will want to consider the type of dividends paid on the shares in light of the risk associated with holding those shares for any appreciable period of time. By understanding the degree of risk in relation to the potential returns, investors can make informed decisions regarding which over the counter stocks to consider, which ones to monitor for possible purchase in the future, and which ones to avoid.

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