The path to penny stock trading is a varied one, but once introduced to these highly volatile stocks that boast 1,000%+ runs most investors are eager to learn more. This path will quickly lead them to the OTC Market and the OTC penny stocks listed there. Soon enough, many beginning traders encounter the problem of where to buy OTC stocks. But in order to maximize the benefits and minimize the risks of trading these microcap stocks, it’s best to first utilize everything that the OTC Market has to offer.
What Is the OTC Market?
OTC Market (Over-the-Counter Market) is a decentralized stock market that includes a network of companies that trade stocks, currencies, commodities, and more. Decentralized means that unlike the New York Stock Exchange which takes place in a centralized, physical location, over-the-counter markets do not have physical locations. Instead, trading is conducted electronically.
Companies and traders on the OTC markets could range from basic penny stocks and first-time traders to some of the world’s biggest conglomerates and veteran investors. This is because foreign companies which are already meeting the filing requirements of their domestic stock exchange often do not want the additional burden of meeting the NYSE or NASDAQ’s high standards as well. Instead, these companies are able to have their shares easily traded on the USOTC market.
With that in mind, the OTC Markets Group is a crucial part of the OTC Market because it is a comprehensive network of over 100 broker-dealers or market makers. The group quotes prices and trades a vast range of stocks and securities on the OTC markets platform, providing price and liquidity information for almost 10,000 OTC securities.
Companies listing on the OTC market are not required to meet some of the strict exchange requirements of other major markets like the NYSE or NASDAQ. For instance, companies listed on a major market like the NYSE have to meet a higher reporting standard and would therefore be under greater scrutiny which is why it is largely considered safer than the OTC Markets.
As a result, some companies prefer to list on the OTC which costs them much less than listing on the national exchanges. Companies with small market capitalizations often find the $500,000 NYSE listing fee or the $75,000 NASDAQ fee to be an obstacle. However, not all the companies listed on the OTC are penny stocks or even small companies. Global brands like Nestle, Allianz, Roche Holding, and Danone are all listed on the OTC because of the unique access it provides foreign companies.
Now the OTC Markets consist of the OTC Pink, OTCQB, and OTCQX marketplaces under the supervision of the OTC Markets Groups. All securities listed here must be FINRA members and registered with the SEC but in order for a company to move or uplist from the lowest tier to the top one, it must achieve high revenues and meet certain operational requirements.
The lowest tier of the three – the OTC Pink or Pink Sheets – is also the largest according to the number of companies and trade volume. It has the easiest requirements for allowing companies to list and only require that companies obtain quotes from a broker-dealer registered with FINRA.
“The Venture Market” or OTCQB is the second tier and all companies must meet a minimum of a $0.01 bid price test and undergo a yearly verification in order to list. Meanwhile the highest tier – the OTCQX – undergoes the OTC Markets’ most advanced level of review leaving only 4% of all OTC companies listed here. Many OTCQX companies go on to uplist to the NASDAQ or NYSE, which means shells and companies in bankruptcy are not listed here.
Why are OTC stocks risky investments?
Companies traded on the Pink Sheets have no reporting requirements and don’t even have to register with the SEC. This often makes these companies riskier investments which is why all traders need to be cautious and use a trustworthy dealer. Recently the SEC has taken steps to make the Pink Sheets safer by enforcing Rule 15c-211 which eliminates the public quotation or listing of companies that do not provide their current and public disclosures to broker-dealers. In this way, traders are restricted from trading stocks that were previously OTC Grey Market or OTC Pink which did not meet these requirements.
While the OTC Markets can present certain risks for investing, the national markets do as well. But the benefit of investing in the OTC is that companies which cannot afford the luxury of waiting to grow before going public are able to prove themselves on the OTC first before eventually uplisting. The market’s trademark volatility has made millionaires out of many traders and the opportunity to trade dual listed foreign companies is often too good to pass up.
Where to buy OTC Stocks?
But before you can begin trading, learning where to buy OTC stocks and how to buy OTC stocks is the first step. An often overwhelming process for any beginner, a simple search will lead to a confusing amount of information and apps – muddying the waters for most first-time investors.
Robinhood Penny Stocks
If you’re entering with little to no knowledge of the stock market, Robinhood is a beginner-friendly trading platform with outstanding user experience. The platform is catered to beginners with tons of helpful knowledge and features that’ll make your first-time experience much more enjoyable. You can make your trades straight from your smartphone and can earn free shares using your referral link, so it’s definitely worth a shot. Even though Robinhood also operates on computers, we don’t recommend it since other platforms are better-suited for that. Also if you’re working full-time and need longer trading hours you might feel a time crunch with Robinhood’s market hours – 9:00 AM EST to 4:00 PM EST – which are shorter than other trading platforms like WeBull.
While finding Robinhood penny stocks is easy, it’s not possible to find any OTC stocks listed on the platform. This is because Robinhood only allows NASDAQ penny stocks and NYSE stocks which is a significant downside to using the platform if you are primarily interested in trading OTC stocks.
WeBull Penny Stocks
Less user-friendly than Robinhood, the switch to WeBull could be difficult at first. However, you’ll benefit from WeBull’s extra data and extended hours. Those additional hours will offer more trading opportunities in addition to its access to cryptocurrencies and paper trading. Paper trading is a very useful feature as you learn the ropes because dealing with fake money will give you real experience without the risk. WeBull has a desktop friendly platform as well which is helpful for accessing its abundance of detailed charting, technical indicators, customization features, and market data. Despite all these resources, WeBull lacks the educational support that beginner traders might need starting out. But with practice and patience, any user can master WeBull’s interface and enjoy all that it has to offer.
Like Robinhood, WeBull does not trade OTC stocks but it does have penny stocks listed on the NASDAQ, NYSE, American Stock Exchange, and other exchanges. However, both platforms follow Section 15(h) of the Securities and Exchange Act of 1934 which means the trader must be approved for each penny stock transaction, the platform must inform them of the risks of penny stock investing, and share other details with the investor as well.
thinkorswim Penny Stocks
This leaves thinkorswim – a trading platform under TD Ameritrade that offers Forex trading, access to foreign stocks, bitcoin futures trading, and numerous stocks that aren’t available on Robinhood or WeBull. You can also trade in small market cap stocks like OTC stocks. But its important to consider the fees associated with OTC trading which are listed as a $6.95 commission applied to online trades of over-the-counter stocks. Thinkorswim excels in providing educational content, research, and paper trading practice as well. However, to access certain features like level 2 market data or trading options, your account will first need approval. The user interface may require some practice but the many opportunities and additional support give excellent exposure to everything the stock market has to offer.
Major Brokers and Penny Stocks
Unlike these other platforms, major brokers like TD Ameritrade, Fidelity, Schwab, and Interactive Brokers are excellent for trading OTC stocks and all other penny stocks. While one broker may put restrictions on a ticker that another broker would not, in general the best way to trade OTC stocks is through these platforms.
Overall, Fidelity and Interactive Brokers are the only brokers that allow you to trade penny stocks without the OTCCB fee of $6.95. While there is typically a $.60 fee on options contracts, these brokers are widely used by penny stock traders and for traders outside of the USA Interactive Brokers is typically the best option.
Keep in mind that there are certain rules such as the PDT (Pattern Day Trader) rule which limits users to trading only three times per five trading days. This means that if you purchase a stock and sell it on the same day, it will count as a one day trade. However, some exchanges will allow you to trade using a cash account which lets you avoid PDT since you’ll be able to trade and sell on the same day without being marked. You’ll still have to wait for your funds to settle when using a cash account but for some, this may be useful.
Now that you know what are OTC stocks, how to buy OTC stocks, and where to buy OTC stocks, it’s time to start investing. After building an OTC stocks list complete with a entry and exit plans based on DD and stock catalysts, you are ready to join the long line of penny stock investors ready to capitalize on the best OTC stocks out there.