Facts About OTC Stocks
Defining OTC Stocks
Stocks, which can have over-the-counter trade, are considered OTC stocks. This would mean that such stocks could be traded via Pink Sheets or OTCBB (Over the Counter Bulletin Board) securities. This would further imply that trading of OTC stocks is via a dealer compared to trading thru formal or centralized exchanges like TEX or NYSE. Trading of these stocks is not via traditional markets, as these companies are quite small. Many brokerage companies ignore stocks below $3 level. However, OTC stocks provide the opportunity to investors, to invest early in companies that are just starting, and showing good potential.
Over counter trading is done for many stocks, as they are quite small or the listing requirements of the exchange is not met by them. One has to cautious before investing in such opportunities, as these companies may not have good rating for their credit, or they are simply penny stocks. Usually, trading of OTC stocks is done by dealers via computer networks, or on the phone.
Level of Risk with OTC Stocks
Any investment has some level of risk, and it is important to know the risks associated with OTC stocks. There could be a number of reasons behind delisting of a company from the common stock exchanges. Such companies could have gone below minimum price of share, or minimum required capitalization. OTCBB listed companies are generally with short operating histories, or are distressed businesses. These are high-risk investments, but they can also generate very high returns.
Using your own diligence is a wise move, before you consider investing in any such company having OTC stock. Research can be conducted by finding latest press releases about the company, and accessing their latest financial report. Such research will enable you to take an informed decision about investing in OTC stock of a particular company.
You should also be wary of dump and pump frauds, which are often related to OTC stocks. This happens by promoting a particular stock by giving hot tips via telemarketing techniques or emails. The individual trying to promote the stock will want to sell at an inflated rate, even though the stock value is prone to diminish. Usually, people who fall for this fraud, tend to lose five and half percent in a couple of days, after investing. Therefore, it is better to do your research independently, rather than paying heed to hot tips.
Succeeding with OTC Stocks
Firstly, it is advisable for inexperienced and passive investors to avoid this option. However, if you are still interested in pursuing this investment option then make sure you work with a reputed investment company or broker. Many big investment companies provide this investment opportunity. OTCBB listed companies have to be researched thoroughly before making any investments. Secondly, tracking of such investments should be done even more closely compared to traditional stocks. It is always advisable to take maximum precautions, and work with a reputed broker, as that will ensure better chances of getting good returns from OTC stocks.