Investing in OTC Stocks 101 – The Basics

When most people think of stocks, they think of the big board – the NYSE – and other exchanges like the NASDAQ. But if you’re reading this, you’ve probably heard whispers of a mystical world where massive returns are realized daily.

This place is known as the OTC markets, and it’s home to stocks that’ll moon for no particular reason. But, of course, this makes the OTC a dangerous arena, as rallies based on nothing crash to Earth just as quickly.

But is there a way to trade on OTC markets safely and profitably? Yes – but it takes tons of research and understanding to find the right investments. Below, we’ll ground you in the basics of OTC markets get you started on your journey.

What are OTC Stocks Anyway?

OTC stocks are shares of companies that don’t trade on major exchanges like the New York Stock Exchange (NYSE) or NASDAQ. Instead, they’re sold “over-the-counter” through a network of broker-dealers.

This process might sound complicated, but it’s quite simple. When you buy or sell an OTC stock, you’re working directly with a broker-dealer instead of going through an intermediary like a traditional exchange.

But there’s more to OTC stocks than the decentralized platform that distributes them. For starters, they’re not subject to the same regulations as exchange-traded stocks. Of course, this fact alone makes these equities riskier, but it also means they are available at a price that’s much more attractive to aggressive investors.

Also, because of the much lower volume on OTC platforms, OTC stocks tend to be more volatile than their exchange-traded cousins. This is a classic double-edged sword situation – on one hand, it means that OTC stocks can offer investors the potential for dramatic gains. On the other hand, however, there’s also a greater chance of losing money just as quickly.

How Do You Trade in the OTC Markets?

Now that we know more about OTC stocks, let’s talk about how to trade them. The first step is finding a broker-dealer that offers access to the OTC markets.

Many traditional online brokers offer this service, but some charge unreasonably high commissions. For example, TD Ameritrade and Charles Schwab used to be notoriously pricey ($6.95 per trade), but competitors like Fidelity ($0 per trade) or TradeStation ($0 up to 10,000 trades) have forced them to go fee-free.

Once you’ve found a broker and funded your account, it’s time to research potential acquisitions. A good starting point is to focus on companies with a market capitalization (market cap) of $50 million or more. These tend to be more established businesses that are less likely to go bankrupt overnight.

Once you’ve found a stock you like, put in a limit buy order. For example, if you’re willing to pay $0.60 per share for Houston Natural Resources (OTCMKTS: HNRC), you would put in an order to buy at or below that price.

No matter how long you plan on holding an OTC stock, the time to sell will eventually come. When you’re thinking of selling, set a limit sell order. This command will automatically sell your holdings when they reach a specified price.

Tips for Staying Safe in the OTC Markets

Whether you have experience trading exchange stocks, or if you just consider yourself to be reasonably intelligent, it doesn’t matter – OTC stocks are incredibly risky. Consequently, you must take steps to minimize your losses.

First of all, you should never invest money you cannot afford to lose. OTC stocks are incredibly volatile – if your entire investment disappears, there goes your mortgage payment, grocery money, etc.

Second, you should set strict stop-loss orders for every position you take. A stop-loss is an order to automatically sell a security when it reaches a specific price. If a stock plummets, you’ll limit your losses.

Last but not least, always diversify your portfolio. This basic investing rule applies to all types of securities, but it’s essential when trading OTC stocks. By spreading your money around, you’ll reduce your risk and increase the chances of making a profit.