Over-the-counter (OTC) stocks are those that aren't traded on a recognised US stock exchange or through a broker.
Instead, OTC stocks are bought and sold via a digital broker-dealer network where trading is conducted directly between the buyer and seller without the involvement of a central exchange.
Many of the stocks that trade on OTC and pink sheet markets will be unlisted companies or companies that have previously been delisted from a standard exchange like the New York Stock Exchange (NYSE).
However, some of the world's largest and most recognisable companies actually trade as OTC stocks, including Adidas, Nintendo and LVMH (Louis Vuitton Moet Hennessy).
While OTC stocks are considered riskier than listed stocks because they're subject to less regulation, they may also represent good investment opportunities due to their volatility and room for growth.
Unfortunately, not every Australian share trading platform will let you trade OTC and pink sheet stocks.
However, there are a number of share trading platforms that do let you buy US and over global OTC stocks, including:
We currently don't have that product, but here are others to consider:
How we picked theseWhen you buy or sell a stock via the OTC market, you interact directly with the other party without going through a broker or exchange, much like you would when selling something on Gumtree or another online marketplace.
Anyone looking to buy or sell an OTC stock can submit a limit order via an OTC network where they select the number of stocks they want to buy or sell at a price of their choosing.
Another party can then choose to take them up on the offer and complete the trade.
However, unlike on regular stock exchanges, the price on OTC stock trades is not always publicly disclosed.
As a result, OTC markets are less transparent and liquid than regular stock exchanges and aren't subject to the same level of scrutiny and regulation.
OTC stocks are listed in one of three OTC markets owned and managed by the OTC Markets Group, the company that manages the largest OTC stock network.
| Name of market | Description |
|---|---|
OTCQX (The Best Market) | The qualifications to list on this market are stricter than for either of the other markets. Many of these stocks are for blue-chip companies in Canada, Europe, Brazil and Russia. Penny stocks cannot trade on this platform. Examples include Heineken N.V. (HINKF), Deutsche Telekom AG (DTEGF) and adidas AG (ADDDF). |
OTCQB (The Venture Market) | This is the mid-tier platform on which OTC stocks can trade. Most of the stocks listed on this platform are for young and growing companies in the US and other countries. Examples include Liberty Broadband Corp. (LBRDB), Solaris Resources Inc. (SLSSF) and Freddie Mac (FMCC). |
OTC Pink (The Open Market) | OTC stocks that don't qualify for the OTCQX or OTCQB are listed on OTC Pink by default. Companies don't have to disclose information to be listed on the OTC Pink, which is why these stocks are considered the most risky. |
Pink sheets is another name given to stocks listed on OTC markets.
Formerly known as the National Quotation Bureau (NQB), OTC Markets originally listed the prices of stocks and bonds on pink and yellow papers, which is where they got the name "pink sheets".
The NQB was renamed Pink Sheets LLC in 2000 and again to OTC Markets Group in 2011.
Many OTC stocks are companies that are just getting off the ground.
They may not meet volume requirements of traditional markets, or the company is looking to save money by listing OTC.
Other stocks are listed in OTC markets because the company has been delisted from a major exchange, for example:
More than 12,300 stocks trade on the OTC Markets. Some companies choose this avenue to avoid filing with the SEC, while others may have been delisted from other exchanges.
Others, like Samsung Electronics (OTC:SSNL.F) are massive, billion-dollar-market-cap companies that trade primarily on foreign exchanges.
Unless you have a brokerage that allows you access to these exchanges (in the case of Samsung, the Korean stock exchange) then you will need to buy the OTC version of the stock.
Many stocks trade over-the-counter because the company is still to small or infrequently traded to meet the volume thresholds of larger exchanges.
For instance, before Walmart became the conglomerate it is today, it traded OTC.
Some companies with stocks listed on OTC Markets include:
OTC stocks are stocks that are listed on one of the markets owned by the OTC Markets Group.
By comparison, penny stocks simply refers to stocks that are priced particularly low, usually under $5.
Some penny stocks trade on well known stock exchanges such as the NASDAQ.
OTC stocks may be cheaper but don't necessarily count as penny stocks.
OTC stocks are more risky than traditional stocks. Companies aren't held to the same reporting standards set out by the SEC as traditionally-listed stocks are.
They can be difficult to research on your own as companies don't need to release as much financial information as would be required for stocks listed on a major exchange.
If you want to take on some more risk and expose yourself to OTC markets, make sure that you research the company thoroughly, and treat lack of information as a red flag.
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