OTC market is one of those investment opportunities that attracts dreamers more than it does serious investors. The stocks traded here come with a great deal of risk but can also potentially payoff spectacularly. It is these few companies that could potentially be hugely profitable that keep people coming back and putting their money into a market where most of the time they will end up losers.
As long as you understand what you are getting into the OTC market isn’t necessarily a bad place to invest. It is just important to make sure that you understand the risks and that you only put a small part of your portfolio into these stocks.
The OTC market is the over the counter market. This is when a financial instrument is sold directly between two parties rather than on an exchange. Almost any kind of financial instrument can be sold in this way but when people refer to the OTC market they are usually talking about stocks.
The stocks traded in this way are often of very small companies and usually trade for very low prices. This is where you would find penny stocks, companies whose stocks trade for less than a dollar. Trading these types of stocks comes with considerably more risk than trading other stocks.
The biggest risk of stocks that are traded over the counter is that many of the companies that trade this way are not very financially stable. Many of these companies will fail and go out of business resulting in the loss of your investment. The other problem with trading stocks in this manner is that in most cases there is no reporting requirement.
Stocks that are traded on a stock exchange have to make regular financial reports and have to have their financial statements audited so that investors know what kind of shape a company is in financially before they invest. OTC stocks don’t have to do this so there is often no way of knowing what the financial situation of a company is. This obviously increases the risk of investing in these companies
That raises the question of just why would somebody want to invest in one of these companies and the answer is the potential rewards are huge. Most of the companies traded over the counter are very small and have a lot more growth potential than the companies that trade on the stock exchanges. The reality is that finding a company that is going to grow into a success is more a matter of luck than anything else.
Most of the companies that are traded over the counter will fail and most of the people who invest this way will lose money. Nevertheless the chance at the big score and the chance to get in on the ground floor of what could turn into a successful company will keep people coming back to the OTC market.