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OTC Penny Stocks VS Nasdaq/NYSE Penny Stocks

What’s The Difference Between OTC Penny Stocks & Nasdaq/NYSE Penny Stocks?

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Trading Penny Stocks On The OTC VS Nasdaq/NYSE

If you’re looking for penny stocks to buy, you’re likely going to find plenty to choose from. In the stock market today, there are, however, a few things to keep in mind. First and foremost, are you able to buy all penny stocks that are publicly traded? This might seem like an odd question. But with the rise in popularity of apps like Webull and Robinhood, penny stocks have taken on a whole new meaning.

In this regard, and for the most part, only certain types of penny stocks are accessible on these platforms. These usually entail stocks traded on either the Nasdaq or New York Stock Exchange (NYSE). Most Over-The-Counter (OTC) penny stocks aren’t accessible on these platforms. But as I said, there have been a few exceptions to the rule. One, in particular, has been Rolls-Royce (RYCEY Stock Report). Needless to say, if you’re new to trading, you might have a few questions.

What Is Over-the-Counter (OTC)?

The first question you might ask is what is “over-the-counter” or “OTC” anyway? The term generally refers to stocks that exchange hands between two accounts without the intervention of an actual stock exchange. But in the U.S., for example, the OTC is handled by different exchanges.

The group that actually operates the market for companies not trading on the Nasdaq or NYSE is OTC Markets Group (OTCM Stock Report). Yes, they are also publicly traded on the OTC coincidentally. The Group also is responsible for providing the real-time quote service to traders. This is knowns as OTC Link.

These OTC penny stocks are also considered to have a bit more risk since they aren’t trading on a major exchange. There are a few important reasons why they aren’t NYSE or Nasdaq stocks – a/k/a “listed stocks”. First, they may lack the proper asset base that major exchanges may require. They also have to meet a minimum price threshold and because many are smaller companies, this tends to work against them (at least early on in their development phase).

[Learn More] Penny Stocks Definition & Frequently Asked Questions

Furthermore, the higher cost to actually list on major exchanges is a barrier as well. Does this mean all penny stocks on the OTC are small companies? No, and, in fact, many of the world’s largest companies are also traded on the OTC. Look at companies like Heineken (HEINY Stock Report), Nintendo (NTDOY Stock Report), Bayer (BAYRY Stock Report), and even Roche Holding Ag (RHHBY Stock Report). These international giants are only accessible to U.S. traders via the OTC Market.

Different OTC Exchanges For Penny Stocks

American depository receipts or “ADRs” represent stocks that trade on foreign exchanges, in many cases, and are typically traded on the OTC. What’s more, as we saw with several Nasdaq/NYSE penny stocks that went into bankruptcy this year, they ended up getting delisted from the major exchanges and ended up calling the OTC home for a period of time. We saw this most recently with Luckin Coffee (LKNCY Stock Report) There are also different tiers of the OTC itself. These include OTCQX, OTCQB, and Pink Sheets. Each tier has its own, individual requirements set in place by OTC Markets Group.

OTCQX Penny Stocks

For instance, OTCQX stocks are at the highest level in the OTC. In general, these companies are thought of as candidates to “uplist” to become listed stocks. They are also required to adhere to stringent guidelines of the Group.

The OTCQX® Best Market is for established, investor-focused U.S. and international companies. To qualify for the OTCQX market, companies must meet high financial standards, follow best practice corporate governance, demonstrate compliance with U.S. securities laws, be current in their disclosure, and have a professional third-party sponsor introduction. Penny stocks, shells and companies in bankruptcy cannot qualify for OTCQX. The companies found on OTCQX are distinguished by the integrity of their operations and diligence with which they convey their qualifications.

OTC Markets Group

OTCQB Penny Stocks

You’ve also got the OTCQB. This is the tier that a god majority of penny stocks appear on. This is the middle tier of OTC penny stocks. These companies are required to report financial statements regularly. They’ve also got to adhere to a certain level of disclosure with OTC Markets Group.

The OTCQB® Venture Market is for early-stage and developing U.S. and international companies. To be eligible, companies must be current in their reporting and undergo an annual verification and management certification process. Companies must meet $0.01 bid test and may not be in bankruptcy.

OTC Markets Group

Pink Sheet Penny Stocks

Finally, there are Pink Sheet stocks. This is typically the lowest tier of OTC penny stocks. Furthermore, the reporting requirements are much less than the other two tiers.

The Pink Open Market provides brokers a platform for transparent trading and best execution in any security. There are no financial standards or disclosure requirements. A wide spectrum of companies are traded on this market, including foreign companies that limit their disclosure in the U.S., penny stocks and shells, as well as distressed, delinquent, and dark companies not willing or able to provide information to investors.

OTC Markets Group

Each tier also has its own fee schedule due to OTC Markets Group. These can range from $5,500 to as high as $23,000 per year depending on the tier.

Pros & Cons Of OTC Penny Stocks

Due to the higher risk with OTC penny stocks, many brokers have placed certain restrictions and even additional fees to clients in order to trade them. As I said above, Robinhood and Webull are two of the platforms with limited or no access to these. Also, when you’re talking about OTC penny stocks VS Nasdaq/NYSE penny stocks, liquidity is also a factor. Here are a few pros & cons between the two sets of penny stocks.

OTC Penny Stocks: Pros

The pros include things like access to companies not otherwise accessible on other exchanges. Some of the examples I gave above, are just a few of the many international companies that are only accessible via the OTC. Furthermore, companies that aren’t yet big enough to list on a major exchange have an opportunity to gain access to markets via the OTC first, then uplist later on. We’ve seen this exact case for many SPACs this year. Special Purpose Acquisition Companies have typically gone public via the OTC, first. They then find their target acquisition, merge it into the company, then uplist to a major exchange.

OTC Penny Stocks: Cons

The downsides however include lack of liquidity, overall. Since many brokers and investment firms won’t trade these, we typically see light trading volumes in OTC penny stocks. Furthermore, the looser reporting requirements creates a higher risk due to unavailable information that investors should be able to access and otherwise do in the case of Nasdaq/NYSE penny stocks.

Should You Buy Penny Stocks On The OTC or Nasdaq/NYSE?

While OTC stocks can pose higher risk, not all penny stocks in this part of the market are “bad”. In fact, many of the top marijuana stocks right now are only accessible to US traders via the OTC. In addition, most of the mushroom stocks are dually listed in foreign markets and on the US OTC. While the OTC and Pink Sheets are notorious for “fraud” and manipulation – watch The Wolf Of Wall Street for reference – this doesn’t mean that thousands of other companies aren’t worth your time. In addition, all penny stocks on the Nasdaq and NYSE aren’t the most active penny stocks either.

If you hear “OTC” and immediately worry about liquidity, there are plenty of listed penny stocks that don’t trade more than 20,000 shares a day.

In the end, whichever types of penny stocks you buy, it’s important to do your research. Understand the risks involved, look for relevant and recent information, and decide for yourself if the list of penny stocks you’ve got in front of you is worth your money.

By J. Samuel

As a trader and expert finance writer, I enjoy finding new and emerging trends that may have been overlooked by the average masses. If there's one thing that a trader or investor wants to know, it's how to use valuable data to their advantage. My expertise is in uncovering this data and compiling it into actionable information. As a professional finance writer, I've contributed to many of the top finance platforms and pride myself on researching factual, publicly available information and using that in all of my articles.

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