How do I buy an over-the-counter stock?

A:

The process of purchasing over-the-counter (OTC) stocks is different than purchasing stock from companies on the NYSE and the NASDAQ. The major difference is that OTC securities are unlisted, so there is no central exchange for the market. All orders of OTC securities must be made through market makers who, instead of just matching orders, actually carry an inventory of securities to facilitate trading.

The first step an investor must make before they can trade in OTC securities is to open an account with a brokerage firm. An investor can choose from either a discount broker or a full-service broker to invest. However, investors should be aware that not all brokers allow trading in OTC securities. An investor's broker will work with the applicable market maker to ensure that the transaction process is completed successfully.

Here is an example of the steps that are taken when an investor makes a market buy order for an OTC stock. After the investor places the market order with his or her broker, the broker must now contact the security's respective market maker. The market maker then will quote the broker the ask price that the market maker is willing to sell the security at. Bid and ask quotes can be monitored constantly by an investor through the Over-The-Counter Bulletin Board (OTCBB).

Since the order was a market order the broker must accept the price quoted. The broker, then, will transfer the necessary funds to the market maker's account and is subsequently credited with the respective securities. If the investor wishes to do so they can place limit or stop orders for OTC securities in order to implement price limits. A similar process is carried out when an investor decides to sell an OTC security.

Although investing in OTC securities seems very simple, they are riskier than stocks listed on exchanges. OTC stocks are often from companies that are extremely small, with markets caps around $50 million or smaller. These companies offer very little information, which may be difficult to find, and they are extremely illiquid which can make it hard to find a buyer.

To learn more see, The Dirt On Delisting, Getting to Know Stock Exchanges and The Lowdown on Penny Stocks.

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