OTC stocks are used by small companies to sell their shares outside of traditional stock exchanges, such as NASDAQ. These stocks are typically sold for very little and are therefore sometimes overlooked by traders.
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However, making a profit with OTC stocks is possible if you use the right methods. Here we discuss what OTC stocks are and several tips to help you profit from OTC stock trading.
What Are OTC Stocks?
Over-the-counter (OTC) stocks are offered by smaller companies outside of traditional stock exchanges. The term “over-the-counter” is used to describe the process in which securities are traded by companies that aren’t listed on informal market exchanges. These stocks are traded through a dealer network rather than in a centralized stock exchange like other stocks.
Companies that use OTC stocks typically aren’t able to meet the listing requirements needed to sell stocks on formal exchanges. OTC stocks are sometimes referred to as unlisted stocks.
The following are the most popular types of securities traded via OTC:
- American depository receipts (ADRs)
- Bonds
- Derivatives
Penny stocks are also stocks that are commonly traded on OTC markets. Penny stocks are stocks that are not listed on major market exchanges and typically sell for $5 or less per share.
How to Make Money with OTC Stocks
There are several tips to keep in mind to ensure you make the most profit with OTC stocks. Consider the following advice when you get started:
Understand the OTC Market Tiers
There are three tiers that the OTC market uses to house its securities and volume. These tiers include:
- OTCQX Best Market: This market is the highest tier and requires companies that use this tier to meet stringent requirements. Examples of companies in this tier include Danone and Adidas.
- OTCQB Venture Market: This is the second tier of the OTC market and is slightly less stringent than the OTCQX market. However, companies still must meet high standards, such as being qualified for an international stock exchange, to use this market.
- Pink Open Market: The Pink Open Parmet is the third tier of OTC markets and has no minimum financial standards. Because of this, investors are not given the level of information on companies that are found in other market tiers and traditional exchanges.
Know What to Look For
OTC stocks and penny stocks can sometimes be risky and require investors to be savvy when trading them. Knowing what to look for will help you ensure you make the most profit on these types of stocks. Factors to consider include:
- Whether the company is making money or not.
- If the company has substantial cash or assets.
- If the company has a solid strategy in place to grow its business.
Hire a Broker
Brokers are great resources when it comes to making the best decisions in stock trading. Setting up a broker account and working with a broker will give you access to resources that will support your OTC stock trading.
Taking time to familiarize yourself with these tips can help increase your ability to make a profit with OTC stocks and expand your investment portfolio.
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