What Is OTC Markets and What You Should Know
If penny stocks are risky, OTC penny stocks are even more volatile. In a bull market with Fed liquidity it’s far less dangerous and far more volatile. You will want to have a broker that allows you to trade OTC stocks, since those pinks can add a lot of “green” to your portfolio.
In the golden age of momentum trading (spring of 2020 and winter of 2021), OTC is king.
OTC stands for over-the-counter markets, and the risks and rewards of investing outside the major stock exchanges are considerable. There’s lot of manipulation on the OTC markets, so the pump and dump cycle is very fast.
OTC investments can include penny stocks, bonds, derivatives, ADRs, and currencies. But for most of us, penny stock OTC is what we will be doing. Always look up an OTC stock to make sure it’s legit. You can do this by looking it up at OTC Markets.
At the Last Futurist we recommend you never buy OTC stocks with major warnings, or that lack transparency. You want the Transfer agent to be verified and for it to have no red flags that could signify illegal dealings.
This FAQ might help. The OTC is the minor leagues of penny stocks which under normal conditions are considered “dangerous”. A pandemic isn’t a normal stock market condition.
Also think about the brokers where you can actually do OTC trading and where the fees make the most sense.
- Interactive Brokers – $.005 per share
- Fidelity – $0 per trade
- TD Ameritrade – $6.95 per OTCBB trade
- Charles Schwab – $0 per trade
- TradeStation – $0 per trade (up to 10,000 shares)
Robinhood and WeBull have a nice interface, but what is popular is not always best.
Investing in OTC securities has advantages, such as getting in on the ground floor of a winning stock. OTC stocks are also so cheap you can buy back losses instead of selling at a loss, whereby you lower your average to exit without risks.
Why Pink Is the New ‘Green’
You want your OTC stocks to be legit pink stocks and not have any warning signs. There are more scams than ever, even amid real small cap momentum stocks. Always google a history of fraud by the company, you would be surprised. I noticed for example $GEVO has many past signals for the shady dealings of the management.
OTC markets are electronic networks that allow two parties to trade with each other using a dealer-broker as a middleman. They are known as dealer networks or markets. This is not part of the real stock market, so in a sense it’s already muddy waters.
Companies that trade OTC are considered public but unlisted. This means their stock can be openly bought and sold, but that the stock is not listed on a major exchange such as the NYSE or NASDAQ. Bankrupt companies often convert to the OTC market and add a “Q” at the end of their ticker.
However some OTC stocks are legit startups that will have great futures, you just have to pick the right one. Doing due diligence on OTC stocks can be some of the most rewarding research you will ever do.
With massive liquidity being pumped into the markets in early 2021, pink is the new green. You will have noticed this with multiple stocks that shoot up that you’ve never heard of. Make lists, whether on CNBC, WeBull or anywhere else, it does not matter.
Stocktwits is a good idea to easily check in with OTC stocks as they finally have them listed with tickers and followers.
Many OTC stocks are subject to at least some oversight by the SEC. In fact, SEC regulations were updated in September 2020 to enhance disclosure and investor protections by ensuring that broker-dealers do not publish price quotes for a security when current information about that security is not publicly available. OTC stocks can enable startups to survive that have no business surviving, but that’s part of business.
In the U.S. startups and innovation has been going down for quite some time, so any potential startup is actually more valuable because it’s rarer in its sector. So by investing in OTC, you are actually investing in American innovation.
OTC: Supporting American Innovation and Small Businesses
Many OTC securities include stocks issued by small companies that don’t qualify to be listed on major exchanges because they don’t trade enough shares or their shares don’t sell above a minimum price. The OTC markets give you access to other markets as well such as some Chinese stocks.
It’s a bit weird for OTC, since other OTC companies are larger, but can’t afford (or don’t want to pay) the listing fees the major exchanges charge. NASDAQ, for example, charges companies up to $163,000 to be listed, assuming they qualify. Not all OTC stocks are created equal.
- OTCQX is the highest tier — these are firms with audited financials that could trade on regular exchanges.
- The next, OTCQB, is for early-stage or growth companies; they must have a minimum bid price of $0.01.
- The Grey Market, sometimes called Other OTC, is a catch-all category for any security that is considered over-the-counter but not quoted by broker-dealers due to a lack of investor interest, lack of financial information, or lack of regulatory compliance.
Finding the right flavor of pink in the Grey Market is where the smart traders go. However with high reward comes higher risk.
OTC trading has had a shady reputation. Partly that’s because of the basic way it operates. In contrast to the total transparency of the stock exchanges, where prices are displayed for all to see, OTC is a buyer and seller secretly negotiating a price.
Manipulation is very common these days, as you can see on any Reddit, YouTube or weird generally more corrupt sector like mining stocks.
Bitcoin related OTC stocks can also be very shady. OTC Cannabis stocks are a paradise in early 2021 with dozens of breakouts. Sector rotation can cause Grey Market winners that are in fact in normal times, pretty rare. These days we see dozens per week. $GNUS was an anomaly in the spring of 2020, but in early 2021, it’s happening all the time.
We have to give fair warning. For regular investors, the only safe way to buy (or sell) OTC stocks is through a reputable broker-dealer using one of the two major online platforms, OTC Markets or OTCBB.
High volatility, low liquidity, scams, and a general lack of oversight are huge risk factors. However in the age of momentum trading, you’d be crazy not to at least dip your toes into the Grey Market and OTC sometimes, just like options trading, it can be part of your portfolio.
Even if you are a momentum small-cap player, you must diversify your portfolio and never hold too much of any one stock relative to your total net worth.
If you are able to be patient and disciplined, and are open to learning something new, OTC markets may be where pink turns to gold.