Published on October 31st, 2019 | by Bibhuranjan

OTC Trading & What To Look For In A Brokerage

In this article, we’re going to explore penny stocks and how to trade them online. Penny stocks have always been a hot topic in the world of stocks and shares. Today, we hope that we can clear up any of the confusion that you might have surrounding them. In addition to this, we’re going to look at online penny stock trading, and what you should consider when looking for the best online brokerage.

Where Do Penny Stocks Trade?

As you may or may not know, penny stocks, for the most part, do not trade on major stock exchanges such as NYSE and Nasdaq. This is due to the highly strict rules and regulations that are imposed by these large exchanges. As a result of a lot of penny stock companies not being able to meet these regulations, they are mostly traded through what is known as “Over The Counter.”

What is Over-The-Counter Trading?

Over-the-counter trading is completely different from large stock exchange trading. It is how smaller companies trade their shares, most commonly penny stock companies. These companies are forced to traded OTC since they often cannot meet the high requirements that trading on the large exchanges requires.

Over-the-counter trades are executed through a stockbroker, as opposed to on a large stock exchange. The main advantage of OTC stock trading is that there are often little to no requirements for listing.

When OTC trading, stock prices can be found on the Over The Counter Bulletin Board, as well as the Pink Sheets. The Over The Counter Bulletin Board, known as the OTCBB, is a service that provides prices and a trading platform. Pink Sheets, on the other hand, is a company that aims to get the shares of small companies onto the market.

Image credits: Investopedia.com

Advantages and Disadvantages of OTC Trading

Over the counter trading brings its advantages and disadvantages. There is no doubt that over the counter trading can be extremely beneficial for a lot of small companies, as well as investors that know what they’re doing and what they are investing in.

As we mentioned earlier, the main reasons that companies exist in OTC trading are because of the strict regulations that exist on the larger, major stock exchanges. In order to still be able to trade their shares, smaller companies and those companies that are n=in need of some capital turn to over the counter trading. There are often no trading requirements whatsoever, and companies can begin listing their stocks for sale right away.

Whilst the nature of OTC and Pink Sheets trading works great for those smaller companies that are looking to sell their shares, it can make for a risky environment for those that are looking to invest. The element of risk in this environment doesn’t come without the prospect of high reward, though. Since an OTC investment is often high-risk for the investor and tends to involve smaller costs in terms of transactions for investors, they can make for particularly lucrative returns assuming that the correct stock is invested in.

However, the main disadvantage of the OTC trading market is the lack of liquidity. Liquidity refers to the number of trades that are taking place within a market as well as how regularly they are taking place. If there were to be a lot of trades taking place regularly in a market, then that market would have high liquidity. On the contrary, if there were to be a low number of trades taking place in a market irregularly, then that market would have a low or poor level of liquidity. A high level of liquidity is good, as it means that stocks and shares are more likely to be able to be traded quickly since there will always be someone around that is interested in purchasing them. Low liquidity is not desirable, since making fast trades when you need them most will be considerably more difficult, if not impossible.

So, what are the main advantages and disadvantages of over the counter trading? Let’s take a look.

Advantages

OTC trading means that stocks that aren’t on the larger stock exchanges for whatever reason can be accessed and purchased
A wider variety of stocks are available compared to larger exchanges due to the looser regulations and rules
There are penny stocks available for purchase which could make for a lucrative investment

Disadvantages

OTC trading offers a reduced level of liquidity, which means that it can be difficult to buy or sell stocks at speed when needed
Higher risk – due to the fact that you won’t be as informed about the stocks that you’re buying and there are few regulations in terms of the companies that can list their stocks, the risk of an investment going badly is higher than it otherwise would be

What Should You Look For In An Online Stockbroker?

When you’re starting to trade in any stocks, be it normal stocks or penny stocks, choosing a good stock broker is very important. However, when it comes to trading in penny stocks, choosing a good stockbroker can be even more important, due to the fact that you’ll want to save money in all areas that you possibly can in order to maximize your profits.

The amount of points that you should look for when choosing an online stockbroker for penny stock trading is pretty large, but let’s take a look at a few of the main ones that are likely to have a considerable impact on your trading experience and results.

Minimal Account Opening Fee – Find a broker that will either charge you nothing or a small amount to open your account – no need to eat into profits before you’ve even started investing!
Commission Fees – Generally speaking, a broker will charge a commission fee for every trade that you make. Try to find a broker with as low a rate as possible.
What Markets You Can Trade On – Some stockbrokers will allow you to trade on more markets than others. Even if you’re only looking to make a couple of trades on one market at the moment, having your options open to other markets is never a bad thing.
Customer Service – Customer service is an extremely important part of choosing a stockbroker. When looking, be sure to read reviews and see what other customers of the broker have to say on the level of customer service available before making a decision.

Tags: brokerage, OTC, over-the-counter, trading

About the Author

Bibhuranjan Editorial Officer, technofaq.org I'm an avid tech enthusiast at heart. I like to mug up on new and exciting developments on science and tech and have a deep love for PC gaming. Other hobbies include writing blog posts, music and DIY projects.