When it comes to trading stocks, mainstream stock exchanges like the NYSE or the NASDAQ usually come to mind. These are regulated markets where stocks of the world’s biggest brands are bought and sold.
However, because most of these companies are blue-chip firms (e.g., established corporations that have been around for a long time), short- to medium-term growth prospects are quite limited.
But, if you’re prepared to take on a great deal of risk, you could earn a great deal of profit in a short time. OTC Markets, or over-the-counter markets, offer this opportunity.
The OTC Markets are less-regulated, and while this means you are much more likely to lose money, you could also ride some massive stock rallies en route to stratospheric ROIs.
Below, we’ll talk about what the OTC markets are, how to trade on them, and the dangers you need to be aware of.
What is an OTC Market and How Do They Differ From Exchanges?
An OTC market is a decentralized market where stocks trade via a network of dealers rather than on a formal exchange. These dealers match up buyers and sellers privately, and most OTC-traded securities are not listed on exchanges like the NYSE or the NASDAQ.
There are three key ways that OTC markets differ from exchanges. Firstly, let’s talk about formal listing requirements. Countless conditions need to be met on the big exchanges, and they are hard to achieve.
Conversely, the listing requirements for some OTC markets could fit on a single sheet of paper, and these conditions are much easier to satisfy. This difference means virtually any company can trade on the OTC markets, regardless of their size or financial stability.
Secondly, exchanges have rigorous disclosure requirements, while OTC markets are far more lenient. In some cases (Pink Sheets), there are NO reporting requirements. As a result, OTC-traded companies offer much less transparency than exchange-listed companies.
Lastly, as mentioned above, OTC markets are decentralized, while exchanges are centralized. This reality means that there is no single location where most trading occurs. Instead, all OTC trades are executed electronically.
The Process of Trading on the OTC Markets
To trade OTC stocks, you’ll need to sign up for a broker that offers access to OTC markets. Companies like Fidelity Investments provide online platforms that offer access to OTC stocks, but there are many competitors, so shop around.
Next, you’ll need to learn more about OTC stocks. Unfortunately, OTC stocks are not required to file with the SEC, so there is often less information available about them. Because of this, you’ll want to dive deep into technical analysis. Technical analysis, in essence, is the study of investor psychology. By studying past price movements, it aims to predict future price movements.
Then, when you’re ready to buy, place a buy limit order. A buy limit order automatically tells your broker to purchase a security at a specified price. Once you own the stock, you can hold it for as long as you’d like or sell it at your leisure.
To sell, you’ll place a sell limit order. This command tells your broker to automatically sell your stock when it reaches a specific price.
Tips for Trading Safely on the OTC Markets
OTC markets lack the regulation that keeps mainstream exchanges relatively free of scandals. As such, people lose money on the OTC every day. However, by learning to trade OTCs safely, you can limit the losses you take.
First and most importantly, only invest money you can afford to lose. Eventually, you will make bad reads, so make sure your rent money isn’t on the line.
Secondly, avoid the Pink Sheets. These stocks are as transparent as a concrete wall, and many are targets for pump-and-dump scams. We recommend sticking to the OTCBB market instead.
Finally, make liberal use of stop-loss orders. These commands will automatically sell your OTC stocks if they fall too far. However, be aware that these orders may take longer to fulfill due to the lack of liquidity in OTC markets.