Over-the-counter (OTC) stocks are stocks commonly offered by smaller companies on informal stock exchanges. OTC stocks are often much cheaper than other stock varieties and are sometimes overlooked by investors as a result. However, this stock option can be a great investment and complementary to an investor’s portfolio. Here we look at what over-the-counter stocks are, the three different OTC marketplaces, and the pros and cons of purchasing OTC stocks to help you get started.
What Is an Over-the-Counter Stock?
Over-the-counter stocks are those that are not listed on formal stock exchanges but are rather traded over-the-counter through a broker-dealer network. A broker-dealer network is a network that relies on a firm or person to complete all of the stock tradings on behalf of its customers. Companies that use OTC stocks often do so because they can’t meet the listing requirements needed to sell their shares on formal stock exchange markets like Nasdaq and the New York Stock Exchange (NYSE).
OTC stocks are typically very inexpensive and typically cost $5 or less per share. Stocks that are less than $5 are referred to as penny stocks.
OTC Marketplaces
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There are three primary OTC marketplaces where traders and investors purchase OTC stocks. These marketplaces include:
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The Benefits and Challenges of the OTC Marketplace
Investing in OTC stocks and trading within the OTC marketplace comes with both benefits and disadvantages.
The benefits of the OTC marketplace include:
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The disadvantages of using the OTC marketplace include:
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OTC stocks are a great option to consider when looking for new investment opportunities. Understanding these types of stocks and how the OTC market works can guide you when deciding if this type of investment is right for you.
