OTC stocks, also referred to as "Pink Sheets", are securities that are not listed on a stock exchange. All OTC orders are made through market makers who carry an inventory of securities to facilitate trading.
What are Over-The-Counter (OTC) Stocks?
OTC stocks, also referred to as "Pink Sheets", are securities that are not listed on a stock exchange. All OTC orders are made through market makers who carry an inventory of securities to facilitate trading. OTC stocks are usually from companies that are extremely small, with markets caps under $50 million. These companies offer very little information, which may be difficult to find, and the stocks are extremely illiquid which can make it hard to find a buyer. OTC stocks are considered riskier than stocks listed on an exchange.
Step 1: Open an Investment Account
The first step an investor must make before trading in OTC securities is to open an account with a brokerage firm. (See How to Buy Stocks Online.) When opening a trading account, investors should be aware that not all brokers allow trading in OTC securities. Note that OTC stocks are generally not allowed to be held in registered (tax sheltered) accounts.
Step 2: Research OTC Stocks
As mentioned earlier, information on this type of company can be difficult to find. They are not required to follow the rules imposed by stock exchanges for posting quarterly and annual reports. A good place to start is OTC Markets, the successor to the old Pink Sheets, and also company websites.
Step 3: Place Your Order
From the investor's perspective, placing an order for an OTC stock is no different than placing an order for an exchange traded stock. Investor may place a market order or they can place limit or stop orders for OTC stocks in order to implement price limits. After the investor places the order with his or her broker, the broker then contacts the security's market maker. The market maker then will quote the broker the ask price that the market maker is willing to sell the security at. The broker will then transfer the necessary funds to the market maker's account and is subsequently credited with the respective securities.
Summary of 'How To Buy OTC Stocks'
From an investor's perspective, OTC stocks can be bought and sold in a fashion similar to stocks bought and sold on a stock exchange. The internal mechanics of the trade are different however and the investor should secure a broker that handles OTC stocks with little or no increase in broker's fees.
OTC stocks tend to be risky investments due to lack of information about the company, and lack of liquidity.