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Over-the-counter stocks, sometimes referred to as unlisted stocks, are stocks that are offered by small companies through a smaller market than more traditional stock exchanges. OTC stocks often have a lower volume of trade compared to stocks that are listed on exchanges and come with a higher risk level. This type of stock typically has a lower share price than other forms of stock and often cost $5 or less per share.
OTC stocks that are less than $5 are referred to as micro-cap stocks or penny stocks. Investors and traders find these types of stocks attractive due to their low cost. The sale of OTC stocks is performed directly through dealers and stockbrokers.
Examples of OTC Stock Securities
Another important component to understanding the question of “what are over-the-counter stocks?” is to know the different types of OTC stock securities. The following are a few examples of the most common types of over-the-counter stock securities you can invest in:
- Common stocks: This type of stock is the most common form of OTC security and often carries one vote per share, meaning that the more shares a person owns the more say they have in the company’s decision-making process.
- ADR/ADS: American Depositary Receipts (ADR) and American Depositary Shares (ADS) are securities that enable foreign companies to list their shares in the U.S. for U.S. dollar amounts.
- Preferred stocks: This type of stock gives shareowners more say in a company’s equity and often provide higher dividends than common stocks.
- Units: A unit is an individual share that’s part of a structured investment, such as a trust or fund. An example of a common unit found in OTC markets is a real estate investment trusts (REIT).
- Foreign ordinary shares: This type of share is a common share from a foreign company that’s allowed to be traded in a U.S. OTC market. These securities are bought directly by American investors rather than bought through an ADR.
Types of OTC Markets
Over-the-counter markets are where investors purchase OTC stocks. The three primary OTC markets include:
- OTC Pink: The OTC Pink market, also referred to as the Pink Sheets, is the most unregulated OTC market and requires little requirements for companies to list their shares.
- OTCQB: The OTCQB market, also considered the OTC Venture Market, subjects companies to a minimal set of standards needed to list their shares. Small companies often use this market and must meet a $0.01 bid price test to be eligible to use this market.
- OTCQX: This market is the most regulated OTC market and is where blue-chip stocks, or stocks with a market valuation of at least $10 billion, and multinational corporation shares can be found.
Taking time to familiarize yourself with the OTC market and how OTC stocks work will ensure you’re prepared to invest in OTC stocks.