OTC Markets: Part One

--> OTC markets are an important part of investing. Investing within these markets can bring massive profits, or devastating losses. In this article, we will explain what they are and how they work. In the next article, we will go more in-depth and explain OTC "market tiers", as well as compare OTC markets to others.

OTC (over-the-counter) trades are trades conducted directly between two parties, the seller (company) and the buyer (you). Unlike normal stocks, there is no middle-man to facilitate the trade; you do it yourself. These stocks are not listed on formal exchanges such as the NYSE and NASDAQ. Instead, they are traded over phone or the Internet by dealers. OTC markets exist to streamline the exchange process. Basically, OTC stocks are stocks that do not trade on formal stock exchanges.

Companies will offer OTC stocks for a variety of reasons. One reason is that the company is not large enough to trade on formal exchanges such as the NASDAQ. There are virtually no requirements to offer an OTC stock and be on OTC markets, while formal exchanges are more selective. This means that most OTC stocks have a great deal of room to grow, and could potentially make you a lot of money. However, because companies with OTC stocks are usually quite small, it is possible for them to go bankrupt, becoming worthless and causing you to lose money.

Another, more negative, reason for companies to offer OTC stocks is that the company may not have submitted the correct filings, which your company must have to have its stock traded on major markets. This can indicate financial trouble, or even a scandal. These can lead the stock in question to drop extremely quickly and cause huge losses.

OTC markets are much more volatile than more established markets such as the NYSE. As such, they could earn you more money in the long run. However, they are very dangerous and you should not take investing in them lightly. Tread with caution. In our next article, we will go more in-depth and explore OTCs further.

Disclaimer: Trading stocks has extremely high risks, and should not be taken to lightly without a thorough understanding. This is written from a purely commentary point of view and is not meant to suggest buying, selling, or holding a stock. All traders must do their own research prior to investing. We (StockQuests) are unaffiliated with all of the companies that are mentioned on this blog, and can't be held responsible for any losses that may occur. Invest at your own risk.