Over the counter trading is a form of direct trading between two parties, the buyer and the seller. Stocks, bonds, derivatives and commodities can be bought and sold through over the counter exchanges. A distinctive feature of over the counter trading is that the transactions are not conducted through a formal exchange.
In other words, transactions need not occur at a single physical location like the stock exchange but can happen through the telephone or Internet. It can also represent transactions that happen through a dealer-network. However, in the US, over the counter trading is done through OTCBB and Pink Sheets securities.
Over The Counter Traded Securities Over the counter traded stocks are primarily penny stocks that are not listed in other stock exchanges. In general, these companies are very small and they will not meet the listing requirements of stock exchanges. So, they are transacted by brokers over the phone or Internet.
Many bonds are not traded on the formal exchange. The investment banks that issue these bonds do so for a specific purpose and the investor must contact the bank to buy or sell them. Even the quotes have to be got directly from the banks only. OTCBB
Over the counter Bulletin Board is an electronic system that displays the latest quotes, volume and last-sale price of OTC stocks. OTCBB is monitored by The National Association of Security Dealers (NASD). Although NASD also owns NASDAQ, OTCBB is not a part of NASDAQ.
The stocks traded on OTCBB have to comply with some requirements as specified by the SEC. However, Pink Sheet securities have no such requirement. The stocks traded on OTCBB have the suffix. OB, while pink securities have the suffix. PK.
Over the counter trading has a lot of potential for making profit. However, the investors must be very careful because it is very risky and is a common place for frauds. In many cases, investors can even loose their entire investment.
A common fraud associated with over the counter trading is called Pump and Dump. The fraudsters will buy a penny stock for a very low value. These people will resort to email and telephone marketing to boost the value of their stocks. Innocent investors, taken by these marketing gimmicks, will buy the shares and this will push the price up.
Once the price goes up, the fraudsters will dump the stock and make money while the innocent investors end up losing most or sometimes even all of their investment. According to a research conducted by Jonathan Zittrain and Laura Frieder, these innocent victims end up losing around 5.5% in just two days.
Investors should be wary of the stocks traded in over the counter exchanges. These companies are small with limited operations. Investors should be aware of the high degree of risk involved before investing. A thorough research about the background, financial health, management, operations and earnings history of the company must be done before investing. However, the right company can provide huge rates of return.
The shares or stocks of a company mean a share in the ownership of the company. Any individual or a company owning shares of a particular company is a co-owner of that organization, and they are also called shareholders. These shares can be bought and sold on regulated and formal stock exchanges like NYSE, NASDAQ, TSX, AMEX, and so on.
There are some shares that are not traded on the formal exchanges. This is mainly because the capital outlay of the company is very small. In order to trade on these formal exchanges, every company must fulfill certain formalities and regulations.
A small company will not be qualified to be listed on these exchanges. The shares of these companies, also called unlisted stock, are traded through a dealer network. The dealers buy and sell these stocks directly with each other over the phone or computer. This dealer network is also called Over The Counter.
The Over The Counter Bulletin Board (OTCBB) is an automatic electronic quotation system. This system displays the real time value, last traded price and volume information for each of the Over The Counter stocks. Investors who trade in these stocks subscribe to OTCBB to track the price of their stocks. The OTCBB is regulated by the National Association of Security Dealers Inc (NASD). Although NASDAQ is also owned by NASD, these Over The Counter securities are not traded on NASDAQ.
Companies listed on the OTCBB must follow certain mandatory requirements laid down by the Securities and Exchange Commission (SEC). However, there are no regulations pertaining to the market capitalization, minimum share price and corporate governance of these companies. In most cases, companies that do not meet the minimum required market capitalization for other formal stock exchanges are traded on the OTCBB. Companies that do not comply with the mandatory regulations laid down by the SEC trade in the Pink Sheets.
Most of the Over The Counter stocks have very thin volume everyday. This means that they are not traded very frequently. So, as an investor, one must be very careful in trading these securities. These shares are avoided by mainstream investors and institutions because the share values can be easily manipulated.
This is the reason why so many frauds take place in Over The Counter share trading. Fraudsters who intend to make money by cheating others trade the shares of a company listed in OTCBB. They will buy many shares just to increase the share value of that company.
Other innocent people who genuinely think that the company is doing well will buy some shares of these companies. When a handful of people buy this stock, its value goes up. As soon as the value goes up, the fraudsters will dump their shares after making a handsome profit.
The innocent investors may end up losing some, or in worse cases, all the money that they invested in these shares. Many investors keep away from Over The Counter stocks because of the manipulative nature of these stocks.
Every investor is expected to do a thorough research on the company before investing in the same. This way, they can avoid being manipulated by fraudsters.
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