How Can You Buy an Over-the-Counter Stock?
The phrase "over the counter" appears in all sorts of contexts. In stock trading, it refers to stock purchased through a broker rather than on an exchange.
What does "over the counter" actually mean in this context? Let's explore the process for purchasing such a financial instrument.
What is Over the Counter for Stocks?
Buying a stock over the counter doesn't refer to arriving at a location and being given the rights to stock ownership there.
The counter, in this sense, is virtual; it relates to the purchase of a stock from a broker rather than from a seller on a stock exchange. Technically, an over-the-counter stock is purchased from a "broker-dealer network"...a brokerage. Capital Markets Elite Group, for example, may offer these services.
Over-the-counter stocks are, mostly, easier to buy. They are often derivatives in nature — or some form of instrument that does not confer ownership of the actual asset being tracked, like a debt agreement.
Without contracts for difference (CFDs), it is difficult for over-the-counter trading to be open to the masses. However, it is certainly possible to purchase actual stocks on an over-the-counter basis.
Just for Certain Stocks?
Some over-the-counter stocks are traded on that basis, and they tend to be those in smaller companies. Because the alternative, getting permission to trade on a stock exchange, has barriers of entry that are too high for the firm to bear.
In those circumstances, taking the over-the-counter route makes sense as it offers a way for a firm to sell its stock and raise capital without having to get themselves listed on a stock exchange, like NASDAQ.
As a result, the type of stock available to the end purchaser or investor might be more restricted; it's worth researching in advance to see if over-the-counter stocks suit your broader portfolio and strategy.
Where Should a Trader Look?
A trader who wishes to purchase an over-the-counter stock can go to what is known as OTC marketplaces. These are designated places where those who want to trade on an over-the-counter basis can do so.
One is called Best Market; another is called the Pink Open Market. Traders will not find any old stock on these sites, and there are still rules. These can vary depending on the marketplace. However, these are the places to go if you're looking for new and potentially high-growth over-the-counter stocks.
A Note on Regulation
Over-the-counter stocks may seem appealing at first, given the high level of regulation that listed companies have to go through in order to raise capital this way. However, those regulations are there for a reason...to protect investors from fraud.
Over-the-counter marketplaces are not necessarily fraudulent...but they come with additional risks. Some marketplaces must provide information about their operations to the stock market regulator (the Securities and Exchange Commission, or SEC for short) — but depending on the exact OTC offering, they may be able to get away without doing that.
Buying an over-the-counter stock is a relatively simple process. Those who wish to purchase blue-chip stocks on a non-derivative basis may find themselves struggling by taking an over-the-counter approach.
For those open to derivatives or who want stocks in smaller firms may well find themselves attracted to the process. Provided the trader keeps an open mind and educates themselves about the risk of fraud, it's possible to do this in a way that is safe and profitable.