What Is Over The Counter Trading?

Over The Counter Stocks

Over the counter trading in terms of the stock market refers to trading stocks outside of the major markets such as the Dow Jones Industrial Market or NASDAQ.  The OTC market as it is referred to, consists primarily of the pink sheets and the OTCBB, or Over the Counter Bulletin Board.  Stocks are traded over the counter for many reasons.  One primary cause is that their value has not reached a steady $2 minimum which is a requirement for the major stock markets such as the NYSE.  This is where many over the counter trading stocks get their name as penny stocks.  While it is true that many stocks traded on the over the counter market are bought, sold, and valued at mere pennies, it is not always the case.  In order to be included in the major markets, publicly traded companies must adhere to strict operational and reporting guidelines as mandated by the SEC, or Securities and Exchange Commission of the United States.  Some companies, BMW of Germany being an excellent example, simply do not wish nor need to comply with US law.  For this reason and nothing more they are relegated to over the counter trading on the over the counter markets of the pinks sheets and OTCBB.

Risks And Benefits To The Over The Counter Market

There are many a financial expert who will warn investors to shy away from the over the counter market.  There is some good advice in this warning.  Companies traded in the pink sheets of the OTC market are not regulated by the SEC.  This means there are no reports of financials, no oversight, and no guarantee into what you are buying.  With the OTCBB there is oversight from the SEC and company financial information is required to be submitted.  This oversight is limited however in scope and pales in comparison to that found in the major markets.  All this aside, there is still a lot of excellent investing to be had in the over the counter markets.  Many day traders, those who work and live exclusively trading stocks day in and day out, make a fortune trading these stocks.  The buy in on a penny stock can be a few percentages of a penny.  This allows investors to buy large amounts of company stocks.  If there is a significant jump in the stock on the over the counter market, there is a lot of potential for income.

Related posts:

1. What Time Of Day Can I Trade?
2. What Are Pink Sheets?
3. What Are Penny Stocks?
4. When Is Day Trading Illegal?
5. What Is A Stock?