Over the Counter (OTC) – Going OTC Can Provide Good Returns at a Higher Risk
When most people think about purchasing stock, they think they have to purchase a stock through a formal exchange like the NY Stock Exchange or the NASDAQ. However, there is an alternative known as “over the counter” or OTC.
The OTC market is where an investor can buy different financial instruments directly with another party instead of through the stock exchange. You can get bonds, stocks, derivatives, and commodities through this market. There is a certain amount of risk associated with the over the counter market. Not all assets exchanged on the OTC market have standard reporting requirements.
Here are a few things to consider when looking at OTC traded financial instruments:
- In order to be traded on the stock exchanges, company stocks have to meet certain guidelines. Not all companies are large enough to meet those guidelines. However, they still have stock to sell and exchange. They are often the ones you can get on the OTC market.
- When a company’s stock value falls below a certain value, they no longer meet the guidelines for exchange markets. These so-called “penny” stocks are still tradable. However, these particular stocks can be quite risky since they come from companies with an unstable history on the market. When considering delisted stocks, it is important to do serious investigation first.
- Bonds are considered OTC products because they are not traded on the exchanges formally. They make up the backbone of many portfolios. Many investment groups will do the work behind the scenes to sell or purchase the bonds directly from the bank. A single investor can do the same thing.
One of the best places to do research on OTC products is through one of the inter-dealer quotation systems: the OTC Bulletin Board or the Pink Quote. The OTC Bulletin Board operates under the auspices of the Financial Industry Regulatory Authority or FINRA. Pink Quote is a service run by Pink OTC Markets, Inc. Each has their own requirements. The OTC Bulletin Board requires all companies on their boards to file financial reports with the SEC or other regulators. Pink Quote does not have that requirement. Most companies on Pink Quote are closely held, thinly traded, or very small.
When looking at OTC securities, doing the initial investigation is all important. Once you are ready to make the exchange, you can get up to date quotes from one of the inter-dealer quotation systems. Once purchased, you can then sell them later by getting an updated quote and finding a buyer.