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Buying and Selling Over the Counter Stocks

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Over The Counter Stocks

What Are Over the Counter Stocks?

Over the counter stocks (OTC stocks) differ from exchange-traded stocks on a few different points. The major differences are all tied to the lack of oversight present when OTC stocks are traded. Exchange-traded stocks have all filed with the Securities and Exchange Commission (SEC). In the over the counter stocks market, some companies have filed but many have not.

As a result of this failure to file, stocks traded exclusively in the over-the-counter arena do not have the benefits accorded to exchange-traded stocks. On an exchange, traders benefit from liquidity. This essentially ensures that there are always buyers for stocks that you want to sell because the exchange coordinates purchases. Since all stocks sold on an exchange have to be qualified members of the exchange, as do the brokers and traders, there is minimal credit risk when making a purchase.

Over the counter stocks are much riskier. Some of these financial instruments are traded through market makers that coordinate sales and purchases. However, many stock deals are managed directly between buyer and seller.

Since many traders are not comfortable with this level of risk, they sometimes create bilateral contracts to manage transactions involving over the counter stocks. These contracts stipulate how each party will handle their respective sides of deals to be made in the future. However, these are mostly prepared by investment banks to use with their clients. Otherwise, OTC traders are on their own as regards security for their investments.

The risks inherent in these trades have heightened since the economic crisis which began in 2007 on Wall Street. The great fear in over-the-counter stock trading is that the other party will default after a deal has been made but before all aspects of the deal have been carried out. There are protections set forth for these situations on the major stock exchanges but not in the OTC market. In such a case, there would be no one to enforce the conclusion of a deal or return monies already paid.

How Do I Buy Over the Counter Stocks?

You must conduct these purchases yourself. An agency known as the OTC Bulletin Board ensures that certain stocks traded under its aegis in the OTC market file with the SEC. However, this does not cover all the over the counter stocks.

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