The Basics of OTC Stocks

Over-the-counter stocks, or more commonly called OTC stocks, offer an investment vehicle for seasoned or new investors and a method to raise capital for businesses. Understanding the pitfalls, common terminology and risks associated with the OTC market can certainly improve your standing if you plan a purchase.

What Are OTC Stocks?

The formal exchanges — NASDAQ, NYSE, etc. — represent the idea investors have in mind when they think about the stock market. The media has consistently shown images of people shouting over loud noise while selling stocks in a high-energy location on Wall Street. Despite this representation, the over-the-counter exchange exists and offers specific companies the opportunity to sell their stocks.

Generally, OTC stocks are held by companies that do not meet the minimum requirements established by the formal exchanges. Pulling together an initial public offering and maintaining positive listing status requires solid financial resources. Consequently, many of the companies that list OTC stocks do not have the financial backing to meet the rigorous requirements, but it does not stop there.

In some situations, the formal exchanges have delisted companies that originally offered their stocks on the formal exchanges. The exchanges may implement a delisting procedure for a number of reasons. Investors should take care to understand why a company was delisted; some companies are delisted due to failure to meet the financial requirements established by the exchange. Trades for this type of transaction require the assistance of a broker-dealer, who negotiates and completes the transaction on an investor’s behalf.

Ultimately, OTC stocks offer beginning and seasoned investors an opportunity to explore penny stocks and other forms of unlisted options. The most important component of exploring an OTC stocks investment strategy is to research the company’s background and assess your risk tolerance.

Stay up to date on OTC stocks by getting on our FREE eMail list!