The Over-The-Counter (OTC) Stock Market
Over-the-counter (OTC) securities carry unique trading patterns and high levels of risks. The Over the Counter Bulletin Board (OTCBB) and the Pink Sheets supply quote information for over-the-counter (OTC) equity investments. OTC regulations are less stringent than those of organized exchanges, which is more so attractive to small companies that have less than $1 million in assets. The OTCBB and Pink Sheets are separate and distinct from each other, and the National Association of Securities Dealers Automated Quotations (NASDAQ) stock market.
Over The Counter Market
Over-the-counter securities trade directly between two parties and rarely are for sale at organized exchanges. Organized exchanges, such as the New York Stock Exchange, join groups of buyers and sellers together to negotiate the price of stock per the auction method. Over-the-counter securities, however, largely refer to customized products, such as forward contracts, or small penny stocks that trade infrequently. As such, OTC securities are not known for liquidity.
Quotes, Additional Information, and Buying Stock
The OTC Bulletin Board is merely a quotation device for brokers and dealers to check share prices and volume, or the amount of shares traded pertaining to these stocks. The Pink Sheets LLC is a private company that also provides real-time quotes for over-the-counter stocks and bonds. The OTCBB does not execute trades, and only members have access to the service. Investors would trade OTC securities through a licensed broker / dealer.
Be further advised that analyst coverage upon OTC stock is minimal. Prospective investors may contact the investor relations departments of the underlying companies for annual reports before deciding to invest. Additional information is also made open to the public online at EDGAR, which is the Securities and Exchange Commission’s (SEC) database for quarterly filings.
Regulations and Requirements
The OTC Bulletin Board carries no initial listing requirements. However, stocks that are quoted on the OTCBB must periodically file financial information with the SEC. OTCBB is “not an issuer listing service.” Issuers, or underlying companies, have no business relationship with this service, or NASDAQ.
The Financial Industry Regulatory Authority oversees broker / dealers, but maintains no direct jurisdiction over the individual OTC equities. The SEC requires brokers to furnish prospective investors with Schedule 15G, which does detail the inherent risks of buying penny stocks, prior buying these investments. The SEC does not regulate the Pink Sheets LLC.
Over-the-counter stocks are extremely risky. The high-risk levels are due to the small size of these companies, lesser regulation standards and minimal public information. Penny, or microcap stocks, trade infrequently and are exposed to extreme volatility. Larger purchases and sales will affect share prices dramatically, because of the small “float,” or shares outstanding actually available to trade. False rumors are also linked to OTC stock volatility. White-collar criminals often target OTC markets for “pump and dump” schemes, where they talk up a position, immediately prior to dumping worthless shares onto unsuspecting investors.