What are OTC Stocks?
OTC stocks are considered any stocks that are traded over the counter. This means that these stocks are traded through the Pink Sheets or the over the counter bulletin board (OTCBB) securities. This means that OTC stocks are traded through a dealer rather than through a centralized or formal exchange like on the NYSE or through TEX. The reason these stocks are not traded through traditional markets is because the companies tend to be small. Most brokerage firms do not follow stocks until they reach the $3 level and OTC stocks offer investors the chance to get in early with emerging companies that show a great deal of potential.
The reason most company’s stocks are traded over the counter is because they are either small or do not meet the exchange listing requirements. It is important to be wary about investing in these kinds of opportunities because they tend to be penny stocks or with companies that do not have good credit ratings. Typically, OTC stocks are traded by dealers directly over the phone or through computer networks.
Are There Risks Associated with OTC Stocks?
With any investment it is important to understand the risks that come with investing money into OTC stocks. There are many reasons why a company has been de-listed from traditional stock exchanges. These companies may have fallen below the minimum capitalization or have fallen below the minimum share price. The companies listed on the OTCBB tend to be distressed businesses or businesses that do not have long operating histories. These are investments that carry a great deal of risk but can also provide a great deal of return as well.
It is wise to do your own due diligence concerning each company you decide to purchase an OTC stock with. Information can be found about the company through recent press releases and from getting a copy of the company’s most recent financial report. The information provided through doing a little background research will enable you to make the best decision before investing in an OTC stock with a certain company.
It is also recommended to be aware of pump and dump scams that are sometimes associated with OTC stocks. This occurs when a person promotes a stock as a hot tip through emails or telemarketing methods. Unfortunately, the person promoting this stock as a winner is trying to sell the stock at a higher price even though it will surely diminish in value. Typically, a person who buys into this scam will loose 5.5 percent in two days time on their investment. You can avoid this kind of scam by doing your own research before buying into any hot tip.
How to Succeed with OTC Stocks
In order to achieve success with OTC stocks, it is recommended that passive or inexperienced investors avoid these kinds of options altogether. If this is an option that you are interested in pursuing, it is advised that you work with a broker or investment company. Several large investment firms offer this kind of opportunity. It is also important to research the companies listed on the OTCBB carefully and then track these investments more closely than you would traditional stocks. Taking the correct precautions and working with your broker will ensure that you experience a return when investing in OTC stocks.
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