OTC Stocks, or over-the-counter stocks, are different from the usual stocks that we regularly buy from major stock markets such as NYSE and the NASDAQ. Most of the stocks that are listed in OTC are penny stocks, which are generally the stocks that are being sold at less than $5 per share. These stocks are those that are being sold by new companies that are just starting with their business. The major difference of OTC stocks from regular stocks in the market is that OTC securities are unlisted, which means that there is no central exchange for the market. This also means that the process on how to buy OTC stocks can also be very different and confusing for more investors.
Choose The Right Broker
Investors who are planning to trade in OTC market must first open an account with a brokerage firm. Of course, choosing the best brokerage firms to process our trading transactions is one of the most important things to consider, so to get the most benefits from our investments. There are two types of brokerage firms to choose from, and these are the discount brokers or full service brokers; though not all brokers allow trading of OTC stocks, and this is something that investors must be aware of.
Those who are already aware on how to invest in penny stocks may choose to open an account with a discount brokerage firm, so to save a lot on cost. However, those who need some investment advice when it comes to finding and choosing the best penny stocks to buy may opt to hire a full service brokerage instead, though this may be very expensive when it comes to service fees and commissions.
How to Trade OTC Stocks
As soon as a broker is selected, the investor who is buying OTC stocks will place his market order with the broker, who will contact the security’s respective market maker. This broker will work with the applicable market maker to make sure that the transaction is processed completely. The market maker will then quote the asking price that the market maker is willing to sell the stocks for. The investor can constantly monitor both the bid and ask quotes through the Over-the-Counter Bulletin Board or OTCBB stocks.
If the order is a market order, the broker must really accept the ask price quoted. Then the broker will transfer the funds to the market maker’s account, and respective stocks will be credited. Investors who wish to control or limit the price when they buy OTCBB stocks may place limit or stop orders for such. The same process applies when the investor sells his OTC stocks.
Understanding the Risk
In general, investors must understand that investing in OTC stocks is much riskier compared to investing in regular stocks in the market, even though the process of trading OTC securities seems very simple. OTC stocks, or also called penny stocks, are sold by new and small companies which are just starting with their business, and investors will not know whether or not such companies will have the chance to grow.