Buying over-the-counter (OTC) stocks are entirely different from buying the stocks from companies on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). But, not all investors are familiar with the process of buying OTC stocks. It is because the OTC stocks are less transparent than exchanges and subject to fewer regulations than exchanges. And OTC market is the decentralized market where the OTC stocks trade and market participants engage with one another through various communication modes such as the telephone, email, and electronic trading systems. Although both participants are not aware of the price at which the transaction was completed.
So, now the question is how to buy an OTC stock?
How to buy an Over-the-Counter (OTC) Stock?
If you are planning to buy an OTC stock then the first thing you must consider is to open an account with the brokerage firm. You can choose from a discount or full-service broker. But, remember that not all brokers provide the facility of trading in OTC securities. To process a successful transaction, the broker works with the applicable market maker.
To understand it clearly, let’s assume an investor makes a market buy order for an OTC stock. Now that the investor places the market order with his/her broker, it is time for a broker to contact the security’s respective market maker. On this, the market maker will quote the broker the Ask price at which the market maker is willing to sell the security at. Investors can monitor these Bid and Ask quotes through the Over-the-Counter Bulletin Board (OTCBB).
Since the placed order was a market order, the broker must accept the price quoted and transfer the necessary funds to the market maker’s account. And if the investor wishes to do so, then they can just place a limit or stop orders for OTC securities in order to implement price limits.
This is how one can buy an OTC stock and carried out the same method when decides to sell an OTC security. Unfortunately, the OTC stocks are not recognized as much as exchange-traded stocks so short selling in the OTC market is very difficult. Plus, the companies whose stocks trade over-the-counter are usually very small. These companies provide very little information, which is, by the way, is very difficult to find. That makes them very difficult to buy.
Nevertheless, if you have a query or would like to add something then doesn’t forget to mention in the comment section below.