What Are OTC Stocks?
3 min read
Not all US stocks trade on major exchanges like the New York Stock Exchange (NYSE) and Nasdaq Exchange. Some trade on over-the-counter (OTC) markets, making them OTC stocks.
What are OTC stocks and how can you get your hands on them as an investor—even when you live across the globe from the US market?
OTC markets, explained
Instead of trading on an exchange, OTC markets offer investors the opportunity to trade stocks directly with market makers. The OTC markets network is called a broker-dealer network because it functions using direct trades.
OTC markets tend to have cheaper listing fees and they don't have set stock price minimums. That's why you'll see so many "penny stocks," or stocks around or below $1, on the OTC markets.
OTC stocks trade on the OTC markets
OTC stocks are those that trade on the OTC markets. These markets include the OTC Bulletin Board (OTCBB), OTC Link, and Pink Sheets.
When you buy OTC stocks, you're purchasing shares of a public company. However, those shares may carry more risk than your average stock on a major exchange. Without traditional exchange standards backing up the stock, investors are losing out on certain protections that come with trading through the NYSE and Nasdaq.
Common features of OTC stocks
OTC stocks typically have lower trading volumes than those on major exchanges. This means less people are buying and selling the stock at any given time.
They also tend to have lower market capitalizations and outstanding shares (aka purchased shares).
Prices tend to be more volatile for OTC stocks than those on major exchanges. That's not to say stocks on the NYSE and Nasdaq aren't volatile (they often are!), but volatility with OTC stocks is higher on average.
Many startups with high growth potential list on OTC markets, meaning there are times when OTC investors are able to get in on the ground floor of a stock's value.
Examples of US companies with OTC stocks
Most OTC stocks are smaller companies, not blue-chip stocks or household names. Here are few:
First National Bank Alaska (FBAK): Shares are trading at $238.96 as of December 2, 2021. Shares are up 28.47% year to date.
Humbl Inc. (HMBL): Shares are trading at $0.41 as of December 2, 2021. Shares are down 31.02% year to date.
Graphene & Solar Technologies Ltd. (GSTX): Shares are trading at $0.76 as of December 2, 2021. Shares are down 53.68% year to date.
Federal Home Loan Mortgage Corp. aka Freddie Mac (FMCC): Shares are trading at $1.00 as of December 2, 2021. Shares are down 57.08% year to date.
One World Universe Ordinary Shares (OWUV): Shares are trading at $0.14 as of December 2, 2021. Shares are up 136.67% year to date.
To trade OTC stocks, investors can use platforms like TDAmeritrade or ETrade. Non-US citizens may be required to submit a paper application to do so.
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