Most of the major companies' stocks are traded on formal stock exchanges like NASDAQ, AMEX and others. These trading facilities are corporate owned and regulated by rules and regulations laid down by the Securities and Exchange Commission (SEC).
In contrast, some financial instruments such as bonds, stocks, commodities or derivatives are traded directly between two parties, the buyer and the seller. These transactions may happen over the phone or through the Internet. There is no formal facility required for these transactions. Such transactions are called Over The Counter Transactions or Trading.
In the US, over the counter trading happens through electronic quotation systems called Over The Counter Bulletin Board (OTCBB) and Pink Sheets Securities. These systems display the last traded price of each share, volume of trade, ask price and the bid price. The ask price is the price at which the seller is willing to sell his or her stocks whereas bid price is the price at which a buyer is willing to buy the shares of a particular company.
The stocks that trade in the OTCBB and Pink Sheets are not listed in any other stock exchange. These companies have to comply with very little or no regulations laid down by the SEC. Stocks listed in OTCBB have to statutorily disclose financial information of the company to the public. Stocks listed in Pink Sheets do not have to follow any rules.
Over The Counter contracts are bilateral contracts between two parties, the buyer and the seller, and it states how the transaction will be settled in the future. This over the counter market is sometimes called the Fourth Market. Many shares are traded in these markets. A recent study found that there are 8,594 securities traded over the counter.
Out of this, 5,019 traded exclusively in Pink Sheets, 130 trade exclusively in OTCBB, and 3,445 trade in both OTCBB and Pink Sheets. This huge market can present a lot of opportunity but these opportunities must be used with tons of caution.
Stocks listed in the OTCBB and Pink Sheets provide good return. However, there is very high risk associated with these stocks. Investors who wish to invest in these stocks must be prepared to lose even the entire invested amount. In order to protect one's investment, every investor must do a thorough research of the company and must not buy a stock based on insider information or hot tip related to the company.
A comprehensive research must be made on the fundamentals of the company including its past performance, growth prospects, financial soundness, management's ability to propel the company forward, financial statements, and its history of operations. Only if the results of the research are favorable should the investor invest in the company.
Since there are lots of frauds and scams associated with over the counter trading, the investor must exercise extreme caution while trading. When there are wild swings in a stock, or if they rise and drop without any specific reason, these are signs of fraudulent manipulation. Investors must keep away from these stocks in order to protect their money.
Author Resource:-
Nir Dotan is a writer and promoter of
OTC Stocks services, and
OTC Stocks Preferred source for the latest news and information on the best and brightest Small Cap Stocks and all Over The Counter Stocks.
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