Introduction To Over The Counter Stocks

The shares or stocks of a company mean a share in the ownership of the company. Any individual or a company owning shares of a particular company is a co-owner of that organization, and they are also called shareholders. These shares can be bought and sold on regulated and formal stock exchanges like NYSE, NASDAQ, TSX, AMEX, and so on.

There are some shares that are not traded on the formal exchanges. This is mainly because the capital outlay of the company is very small. In order to trade on these formal exchanges, every company must fulfill certain formalities and regulations.

A small company will not be qualified to be listed on these exchanges. The shares of these companies, also called unlisted stock, are traded through a dealer network. The dealers buy and sell these stocks directly with each other over the phone or computer. This dealer network is also called Over The Counter.

The Over The Counter Bulletin Board (OTCBB) is an automatic electronic quotation system. This system displays the real time value, last traded price and volume information for each of the Over The Counter stocks. Investors who trade in these stocks subscribe to OTCBB to track the price of their stocks. The OTCBB is regulated by the National Association of Security Dealers Inc (NASD). Although NASDAQ is also owned by NASD, these Over The Counter securities are not traded on NASDAQ.

Companies listed on the OTCBB must follow certain mandatory requirements laid down by the Securities and Exchange Commission (SEC). However, there are no regulations pertaining to the market capitalization, minimum share price and corporate governance of these companies. In most cases, companies that do not meet the minimum required market capitalization for other formal stock exchanges are traded on the OTCBB. Companies that do not comply with the mandatory regulations laid down by the SEC trade in the Pink Sheets.

Most of the Over The Counter stocks have very thin volume everyday. This means that they are not traded very frequently. So, as an investor, one must be very careful in trading these securities. These shares are avoided by mainstream investors and institutions because the share values can be easily manipulated.

This is the reason why so many frauds take place in Over The Counter share trading. Fraudsters who intend to make money by cheating others trade the shares of a company listed in OTCBB. They will buy many shares just to increase the share value of that company.

Other innocent people who genuinely think that the company is doing well will buy some shares of these companies. When a handful of people buy this stock, its value goes up. As soon as the value goes up, the fraudsters will dump their shares after making a handsome profit.

The innocent investors may end up losing some, or in worse cases, all the money that they invested in these shares. Many investors keep away from Over The Counter stocks because of the manipulative nature of these stocks.

Every investor is expected to do a thorough research on the company before investing in the same. This way, they can avoid being manipulated by fraudsters.