How to Buy OTC Stocks

SHORT ANSWER: You can buy OTC stocks with Interactive Brokers or Webull.

Many companies that offer exceptional value are still starting out and can be found on the over the counter (OTC) market. Buying or selling OTC stocks is different than trading stock on the New York Stock Exchange or the NASDAQ. Learn more about the OTC market and how you can start trading with Benzinga's expert stock analysts.

What are OTC Stocks?

OTC stocks are generally too small to meet the requirements needed to list on the major exchanges. These stocks are traded by broker-dealers that negotiate directly between 1 another through computer networks or over the phone.

These stocks are normally still governed by the Financial Industry Regulatory Authority (FINRA).

OTCs at a Glance

The OTC network isn’t limited to stocks. It encompasses any financial instruments that aren’t directly traded through a central exchange, including stocks, bonds and derivatives.

Some major differences between the OTC exchange and major exchanges include:

• Transaction transparency, which means you may be limited on what bids and offers you can see based on your broker, rather than seeing all orders available, including markups on foreign exchange stocks.
• On major exchanges, every party receives offers from every counterparty. This doesn’t always occur on the dealer exchange and can create information disparity.
• OTC exchanges have fewer rules and regulations than centralized exchanges. This leads to higher competition between the providers to get more volume for their firms, which results in lower transaction costs.
• Stocks found on the OTC market are often penny stocks with prices as low as $0.05 to $0.10. Coupled with large spreads, you can end up buying a stock at the $0.10 ask price, and it can immediately trade to the $0.05 bid price and lose 50% of its value.

How to Buy OTC Stocks

Investing in OTC ( over-the-counter) stocks can be an interesting opportunity. These stocks are traded outside major exchanges like the NYSE or NASDAQ. They often include smaller or less-established companies. There is potential for high returns, but there are also risks. OTC stocks can have lower liquidity, more volatility, and less strict reporting rules. To succeed, investors should educate themselves and develop a strategy. It’s important to know how to research OTC stocks, choose the right broker, and assess risks. This guide provides key steps for buying OTC stocks and helps investors find opportunities in this market segment.

Step 1: Determine How Much You Want to Invest

OTC stocks are inherently riskier than those traded over the regular exchanges. Treat these stocks as speculative and size your positions appropriately. Don’t invest money you’re not willing to lose.

Step 2: Find an Appropriate Broker

Many of the major brokerage firms that you use for regular stock trading allow for the trading of OTC stocks. Fees can vary for OTC versus regular stocks, so make sure you understand what the costs are relative to normal trading.

Step 3: Decide Where to Buy Your Stocks

When you look into OTC stocks, there are several places you might find them. The Best Market (OTCQX) houses stocks with large market caps, high liquidity and solid backing. The Venture Market often carries stocks from startups or companies in the development phase. The Pink Open Market and grey sheets could contain shell corporations, businesses enduring a bankruptcy or companies delinquent on filings/under investigation. Limiting your search to the Best and Venture Markets is safer, especially for novice investors.

Step 4: Fund Your Account

Many of the major brokerages allow you to trade the OTC market. You’ll need to check whether you would be eligible to trade on OTC markets with your broker.

Step 5: Purchase Your OTC Stocks

While it’s fairly easy to purchase stocks on the major exchanges, it may take a bit more to understand how to execute a trade on the OTC markets. Consult customer service for your broker-dealer to understand how to execute an OTC trade through its specific platform. When you place an order, you’ll have an option for market orders or limit orders. With a lower liquidity, the spreads can be much wider than on normal exchanges.

Your broker-dealer has a few options when handling your order. It’s possible to fill the order internally by matching clients within the brokerage. Otherwise, brokers can send the quote out to the OTC market to make the trade with another broker-dealer. If an order is not marketable, the broker-dealer may need to change the existing quote to reflect the new price or size.

Best Brokers for Purchasing OTC Stocks

Take a look at our recommended brokers to get started investing in OTC penny stocks.

Why Should You Buy OTC Stocks?

Over-the-counter (OTC) stocks offer a unique opportunity for investors looking to diversify their portfolios beyond traditional exchange-listed companies. These stocks are traded directly between parties, often through a dealer network rather than on major stock exchanges, which can provide access to a wide range of smaller, emerging companies. While they come with higher risks, including lower liquidity and less regulatory oversight, OTC stocks often present potential for substantial returns, especially for those willing to conduct thorough research. In this discussion, we will explore the advantages of investing in OTC stocks, including increased growth opportunities, potential for discovering hidden gems, and the allure of investing in innovative and niche markets. Understanding these factors can help investors make informed decisions about whether to include OTC stocks in their investment strategy.

Potential for High Returns

Investing in OTC stocks can yield significant returns. These stocks are often associated with smaller, emerging companies. These companies have not yet reached major exchanges but show growth potential. By investing early, you can participate in the early stages of businesses that may grow rapidly. Smaller firms typically have more room for growth compared to larger companies. This can result in substantial increases in stock value over time. However, the risks are higher. Many of these companies are still developing or operate in unstable sectors. Nevertheless, successful companies can provide returns that exceed those of more established stocks. For experienced investors willing to take on risk, OTC stocks offer a chance to identify future industry leaders before they attract mainstream investors.

Access to Niche Markets

OTC stocks offer access to niche markets and international opportunities not easily found in major exchanges like the NYSE or NASDAQ. Many companies in OTC markets operate in specialized industries. These include technology startups, biotech firms, and renewable energy companies. Such industries are often underrepresented in traditional stock markets. OTC markets also allow investment in international companies from regions with less strict listing regulations. This opportunity enables investors to diversify their portfolios beyond standard industries and locations. It can increase the chances of discovering high-growth opportunities in untapped markets. Investing in these areas can broaden your portfolio and connect you to emerging trends and innovations.

Lower Entry Costs

OTC stocks are appealing because they are affordable. Many are priced lower than stocks on major exchanges. This makes them accessible to more investors, especially those with limited capital. Lower prices allow small-scale investors to buy significant amounts of stock. They do not need to invest large sums of money. This affordability helps beginners and those with smaller portfolios enter the stock market. It allows them to build a diversified range of investments. Additionally, lower entry costs enable investors to spread their money across multiple OTC stocks. This can enhance potential returns and minimize risk through diversification. If one stock underperforms, the impact on the overall portfolio is reduced. Overall, OTC stocks provide accessibility and flexibility. This makes them an appealing option for investors at different experience levels.

Considerations Before Buying OTC Stocks

Investing in over-the-counter (OTC) stocks requires caution. This part of the market is less regulated. OTC stocks are often from smaller or emerging companies. They can offer high returns but also come with higher risks. These risks include limited financial transparency and lower liquidity compared to stocks on major exchanges. Investors should consider the fundamentals of the company and the liquidity of its shares. It's also important to be aware of market conditions and regulations. Understanding these risks is key to making informed investment choices. This guide will help you assess if OTC stocks fit your investment strategy and risk tolerance.

Higher Risk and Volatility

Investing in OTC stocks involves increased risk and volatility. Many companies in the OTC market are smaller or operate in high-risk industries. These factors make them more susceptible to market fluctuations and economic changes. As a result, price swings can be sharp and unpredictable. Volatility may arise from limited market interest, small trading volumes, or company-specific events like product launches or leadership changes. While OTC stocks can offer the potential for high rewards, they also carry the risk of substantial losses in a short time. It is important to approach these stocks with caution. Their prices can be very sensitive to news and external factors, leading to dramatic fluctuations in investment value.

Limited Information and Transparency

OTC stocks face significant challenges due to limited information and transparency. Companies listed on the OTC market do not have the same requirements as those on major exchanges like the NYSE or NASDAQ. They are not always obligated to file detailed financial reports with the SEC. This makes it more difficult for investors to understand a company’s financial health or growth potential. With limited access to reliable data, investors may base decisions on outdated or incomplete information. Furthermore, the lack of transparency raises concerns about management practices and business strategies. This uncertainty can affect a company's long-term viability. As a result, investing in OTC stocks carries a higher risk of dealing with unstable or poorly managed companies.

Liquidity Issues

Liquidity is the ease of buying and selling shares. It is an important factor for any investment, especially within the OTC market. Many OTC stocks have low liquidity. This means there may not be enough buyers or sellers for smooth transactions. Investors may struggle to enter or exit a position quickly if they cannot find a willing buyer or seller at a reasonable price. In thinly traded stocks, the difference between the bid price (what buyers will pay) and the ask price (what sellers want) can be large. This leads to wider bid-ask spreads, which can increase trading costs. Investors may have to accept less favorable prices than anticipated. Additionally, the lack of liquidity makes OTC stocks more susceptible to price manipulation. A few trades can artificially change a stock's price. For investors, this creates challenges when exiting positions. Market downturns can worsen liquidity issues. Without enough market participation, selling shares can result in a significant discount. This can lead to larger losses for investors.

Should You Buy OTC Stocks?

Buying OTC stocks can provide investment opportunities and risks. Some OTC stocks have high potential returns and often belong to emerging companies with growth potential. However, many OTC stocks are speculative. They do not undergo the same regulatory scrutiny as stocks listed on major exchanges. This makes them prone to volatility and limited liquidity. Additionally, they may be subject to fraudulent schemes.

To explore this market, it's important to do thorough research. Investors should examine the company's fundamentals, financial status, and market potential before investing money. Working with a trustworthy broker who focuses on OTC trading can also offer helpful advice and reduce some of the risks linked to these stocks.

Before getting into OTC stocks, it's important to know your investment goals. Think about how these high-risk investments align with your overall strategy and comfort with risk. In short, while OTC stocks can provide special opportunities, they need to be approached thoughtfully, with thorough research and attention to detail to steer clear of potential problems.

Open Your Brokerage Account and Get Started in OTC Stocks

Investments in OTC companies should be treated as highly speculative. Don't make OTC stocks a core component of your portfolio.

Be sure to visit the FINRA website to research and prepare for what to expect trading on the OTC markets.

Frequently Asked Questions