Over-the-counter stocks are those that aren't traded on one of the major exchanges like the New York Stock Exchange or the Nasdaq exchange, often because share prices or company total values aren't high enough. Some offer price quotes on specialized systems like the Pink Sheets. You can buy and sell OTC stock as with other stocks through a broker, although it may take longer to execute a trade, and you may see heftier fees than with other stocks. Make sure you understand the risks involved in buying OTC stock or any other investment.
Understanding Over-the-Counter Stocks
Many of the most familiar stocks to investors are bought and sold through major exchanges like the NYSE or Nasdaq. These exchanges generally have various requirements for the companies they list, such as how much they have to be worth and the minimum price each share must sell for.
Companies that don't meet those requirements can still offer stock for sale, provided they meet whatever legal requirements exist to do so. These stocks are called over-the-counter stocks. Price information about them is available through centralized resources with names like the Pink Sheets, which was at one time a physical directory printed on pink paper, and the Over the Counter Bulletin Board, or OTCBB. Stocks listed on the OTCBB or similar services may have ticker symbols preceded with OTCBB or another similar abbreviation for another such service, like OTCMKTS, which represents OTC Markets Group company.
Other information about the companies and stock may be available through the companies themselves, brokerages, financial news sites and regulatory filings made available by the Securities and Exchange Commission and other government agencies. However, there may be less information available about stocks listed on the OTC markets than with those listed on the major exchanges. As with any stock or investment opportunity, carefully research the OTC stock you are thinking of buying.
Buying and Selling OTC Stock
You can buy and sell OTC stock through a traditional stockbroker, including many discount online brokers, just as you would buy or sell stock listed on the big exchanges. Not all brokerages handle OTC stock, however, and some may charge extra fees for doing so.
Contact your brokerage or research new brokerages if you're not sure what your options are for buying OTC stock. Make sure you understand and are comfortable with the transaction fees you will pay. Keep in mind that if you intend to trade frequently, these fees can add up.
Because OTC stocks often trade at low volumes and may not have many outstanding shares, it can be difficult to immediately buy and sell the stock. You may not be able to buy or sell at exactly the price you want or exactly when you want, so take this into consideration when making your investment decisions.
Buying Directly From a Company
In some cases, you can buy stock directly from the company that issued it through what's called a direct stock purchase plan. This is more commonly seen with big blue chip companies than with smaller businesses, but you may see this option for over-the-counter stock as well. It's a way to buy and sell stock in a particular company without working through a broker.
In some cases, fees can be lower or stock can be cheaper than when purchasing through a traditional brokerage, although this is less common than in the past with many online brokerages offering low or even zero transaction fees. If you're considering buying stock through a direct purchase plan, make sure you understand the terms of the deal and confirm that it is a good option for you.
Penny Stock Trading
Many of the stocks available over the counter are what are known as penny stocks. These are stocks that trade for relatively low prices, although not usually literally for a penny. Typically, the term means stocks available for $5 or less.
Whatever the exact definition, penny stocks can be a good investment for skilled investors, providing a good way to get in the ground floor of a growing company. They can also be an easy way to lose money, since many of the companies with prices in this range are either just starting out and unproven or on their way downhill.
Concerns About Penny Stocks
Because penny stocks have small market capitalizations, or total company values, and relatively low trading volume, they can also be an opportunity for scammers running what are sometimes called pump-and-dump schemes. They or their affiliates purchase shares in penny stock companies and then promote the companies on online message boards, email lists or other venues without revealing their conflict of interest. Once other investors get excited and bid up the price, they sell their original shares, making a profit and leaving the recruited investors holding the stock as the price drops.
Be wary of anyone touting penny stocks or other investments if you can't determine whether they're somehow linked to the companies involved. Take online advice with a grain of salt and do your own research into any touted opportunities.
Diversifying Your Investments
It's often a good idea to consider your entire basket of investments and how it's balanced between riskier and less risky securities and between different sectors of the economy. This process is called diversification, and it helps make a healthy return on your investment more likely without too much risk of losing everything.
If you're investing in penny stocks, you'll likely also want to put some funds into more secure investments, whether they're investment funds looking at broad market indexes, blue chip companies or government bonds. Many online finance sites and brokerages can help you decide how to balance your investments based on your age, current level of savings and investment goals.
Stock Market Trading and Taxes
Whether you're buying OTC stock or any other type of securities, you may owe taxes if you sell your stock for a profit. The federal government taxes investments you've had for one year or longer at the federal long-term capital gains rate, which for most taxpayers is a flat 15 percent rate. Some taxpayers may owe 20 percent or 0 percent on capital gains, depending on overall income. Whatever the exact rate, capital gains tax rates are usually lower than what you would pay on ordinary income, such as what you earn at work.
If you hold on to stock for less than a year, you will pay your ordinary income rate on what is then considered a short-term capital gain. If you lose money on stock sales, you can declare a capital loss on your taxes. A capital loss can offset capital gains in the same tax year or up to $3,000 in ordinary income, and you can roll capital losses into future tax years if you have more than you can deduct in a single year. Taxes may be one factor in deciding when to sell stock.
States have their own rules about capital gains taxes. Study your state's rules to know how much you owe. Stocks bought and sold within retirement accounts, such as individual retirement arrangements or 401(k) plans, are taxed based on the rules for those plans, usually when you withdraw money from the accounts.
Video of the Day
- OTC Markets: About Us
- Investopedia: Over-the-Counter
- Investopedia: How Do I Buy an Over-the-Counter Stock?
- Investopedia: Direct Stock Purchase Plan
- Investopedia: Penny Stock
- Investopedia: Pink Sheets
- IRS: Topic Number 409 - Capital Gains and Losses
- US News: Penny Stocks: 5 Ways to Spot a Pump-and-Dump Scam