Buying OTC (over the counter) stocks is unlike buying stock from companies traded on the NYSE (New York Stock Exchange) or the NASDAQ (National Association of Securities Dealers Automated Quotations). The difference is that most OTC securities have either been de-listed or never made the cut to begin with. As a result, OTC stocks are traded on Pink Sheets or the OTCCB (Over-The-Counter Bulletin Board). The requirements for these exchanges are minimal, so the risk involved in trading them is higher, but they can be purchased all the same.
Following are the steps to buy OTC Stock :
- Do your research. OTC securities are riskier than stocks listed on the major exchanges. These companies are usually very small with little volume and liquidity—this can make it hard to find a buyer. It is also difficult to find information on OTC stocks as they are not required to provided investor information.
- Open an account with a discount brokerage firm. Not all brokers allow trading in OTC so be sure to verify before funding your account.
- Look up a quote for the stock on the OTCBB. Bid and ask quotes can be monitored constantly through their website. They can also be monitored by looking at the Pink Sheets. Both are exchange houses which provide quotes for OTC stocks.
- Request a limit order. While brokers usually don’t accept limit orders on OTC stock, it does not hurt to try. A limit order is a certain price you are willing to trade at, whereas a market order is the current market price quoted. If the stock is illiquid, a market order could ruin your chances of making a decent profit. Check the bid-ask spread before making the trade.
- Place a stop order. This is an order to a broker to sell (buy) when the price of a security falls (rises) to a certain price level. Like the limit order, it will help to control and limit losses.