Trading Penny Stocks On The OTC v.s Nasdaq/NYSE
If you’re looking for penny stocks to buy, you’ll likely find plenty to choose from. There are, however, a few things to keep in mind in the stock market today. First and foremost, are you able to buy all penny stocks that are publicly traded? This might seem like an odd question. With the 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 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 (OTC:RYCEY). 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 operates the market for companies not trading on the Nasdaq or NYSE is OTC Markets Group (OTC: OTCM). Yes, they are also publicly traded on the OTC, coincidentally. The Group also is responsible for providing 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 required by major exchanges. 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).
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Furthermore, the higher cost of listing on major exchanges is also a barrier. Does this mean all penny stocks on the OTC are small companies? No, and many of the world’s largest companies are also traded on the OTC. Look at companies like Heineken (OTC: HEINY), Nintendo (OTC: NTDOY), Bayer (OTC; BAYRY), and even Roche Holding Ag (OTC;RHHBY). 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 got delisted from the major exchanges and ended up calling the OTC home for a period of time. We saw this with companies like Luckin Coffee (OTC: LKNCY). Other companies drop to the OTC when they go into bankruptcy proceedings. This will also see the addition of a fifth letter of “Q” to their stock symbol.
There are also different tiers of the OTC itself. These include OTCQX, OTCQB, and Pink Sheets. Each tier has its requirements set in place by OTC Markets Group.
OTCQX Penny Stocks
For instance, OTCQX stocks are at the highest level in the OTC. Generally, these companies are considered candidates to “uplist” to become listed stocks. They are also required to adhere to the 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 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. Depending on the tier, these can range from $5,500 to as high as $23,000 per year.
Pros & Cons Of OTC Penny Stocks
Due to the higher risk included in OTC-listed penny stocks, many brokers have placed certain restrictions and even additional fees for clients to trade them. As I said above, Robinhood and Webull are two platforms with limited or no access to these. Also, when 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 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 can 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 a 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 create 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, Nasdaq, or NYSE?
While OTC stocks can pose a higher risk, not all penny stocks in this part of the market are “bad.” Many of the top marijuana stocks right now are only accessible to US traders via the OTC. In addition, many foreign-headquartered companies like those mentioned earlier 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, plenty of listed penny stocks don’t trade more than 20,000 shares a day.
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In the end, whichever type of penny stocks you buy, it’s essential 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 is worth your money.
