Smart investors know that if you want to make the big money off a small account, the over-the-counter (OTC) markets are the place to be. The problem is that many don’t know how to buy OTC stocks or where to get started. In this article, Insider Financial will show you the way.
To begin with, let’s define what OTC stocks are in the first place. As you may know, there are two large groups of companies: private and public. The former is owned by individuals, families, or groups of people and institutions. In the US, they are not required to share their financials, as they don’t sell shares or stakes to the public. Retail investors don’t have the possibility to buy stakes in these companies, which are in a league of their own.
On the other side, public companies are open to investors in the sense that anyone can buy shares and thus become partial owners of these companies, with or without holding voting rights. There are multiple platforms that handle the interaction between buyers and sellers of stocks. However, the market is hierarchized in multiple layers. Large companies usually trade on stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ, which act as auction markets.
However, there are many small or medium-cap public companies that are not listed on these exchanges, and their shares are traded directly between buyers and sellers. The stocks of these companies are called OTC stocks. OTC markets are electronic networks that facilitate the trades, acting as middlemen. They function as broker-dealers rather than auction markets. While OTC stocks are not closely monitored by governing institutions such as the NYSE, they’re still subject to regulatory oversight from the Securities and Exchange Commission (SEC). Also, broker-dealers themselves should be regulated by the Financial Industry Regulatory Authority (FINRA) in order to operate legally.
Note that some investors might use OTC stocks and penny stocks interchangeably, but they’re different, even though the two may overlap. In a nutshell, penny stocks are any stocks priced at less than $5 per share. While most OTC stocks are in this group, there are many penny stocks that relate to companies listed on NASDAQ or NYSE American – the big league, so to speak.
Why Invest in OTC Stocks?
The main reason to get into OTC stocks is their growth potential. Investors are interested in the percentage return, which can easily reach double or triple-digit figures with OTC stocks, given that many of these companies are only starting their journey while their market cap value is small compared to blue chips. It’s difficult to imagine how a $50 billion company doubles its market cap in a matter of days, which is true for so many OTC stocks.
For example, in 2021, the best-performing stock across the S&P 500 index rose 196%. While this is definitely a great performance, OTC stocks can show astronomic returns. For instance, OWUV was one of our big winners in 2021, surging by over 2,600%.
Many blue chips started small. Thus, investors may find the next mega-cap of tomorrow, especially when it comes to the sectors related to new technologies, such as blockchain, cryptocurrency services, metaverse, and so on.
Investors may also be interested in buying OTC stocks because of their small share price.
Another reason to invest in OTC stocks is their lower correlation to the general market, which is usually cyclical. There are many good OTC stocks that can boost your portfolio’s value in the long term, irrespective of what happens in higher-tier markets. We at Insider Financial preach the key to trading OTC stocks for investors is finding momentum BEFORE it happens and ahead of the crowd.
We alert our subscribers with our best ideas before our regular readers. This is the value of having a subscription to Insider Financial, which you can sign up for here.
If you watch the Insider Financial YouTube channel, you can get a sense of the ideal time to book profits. We warned our subscribers not to get greedy or get caught up in the diamond hands/paper hands BS.
We also recommend you own a portfolio of penny stocks. That can be as many as 10 to 20 or more OTC stocks for some. This provides diversification and allows one to manage the market’s moods much easier. It also helps reduce the potential risks related to price volatility.
The OTC market can often host fraudulent companies, scammers, and companies that fail to provide accurate data, which is why it’s important to do due your diligence by performing in-depth analysis. Alternatively, you can count on Insider Financial, as we select established companies with proven operations and strong fundamentals.
How to Buy OTC Stocks
The first thing you need to do is find a broker that allows you to trade OTC stocks. Webull allows some OTC stocks to be traded, while Robinhood doesn’t allow any OTC trading.
In this video, Alex Carlson, the editor-in-chief of Insider Financial, talks about which brokers to use to trade OTC stocks.
Picking OTC Stocks
Once you register with one of the online brokers that support OTC stocks, buying shares is technically easy. The difficult part is to select the OTC stocks that would eventually bring you profits. Thankfully, we at Insider Financial provide great insights that may help you with the research part.
As a rule, we recommend investors build a portfolio of 10 to 20 OTC stocks for the sake of diversification.
Usually, we select OTC stocks from the primary over-the-counter network in the US, which is the OTC Markets Group (OTC Markets). This is in fact where the majority of OTC trades take place. The great thing about OTC Markets is that it operates like traditional exchanges, in the sense that it imposes some requirements and oversight for the listed companies to avoid scams and fraudulent activity as much as possible.
OTC Markets lists all the stocks in three tiers, depending on their market capitalization, share price, and the amount and quality of their financial reporting. The three main tiers are as follows:
OTCQX Best Market (OTCQX) – this is the highest tier and it includes established, investor-oriented US and international companies. To qualify for this tier, companies must comply with high financial standards, follow best practice corporate governance, abide by the US securities laws, be current in their disclosure, and have a professional third-party sponsor introduction. Companies in bankruptcy and shells don’t qualify for OTCQX. Besides the US-based firms, OTCQX acts as the US market for international companies that are already listed on major exchanges in their respective countries. Many OTCQX companies have all prerequisites to uplist on major exchanges like NASDAQ or the NYSE. The market cap of these companies usually ranges from tens of millions of USD to tens of billions or higher. For about half of OTCQX members, the share price is higher than $5 and thus doesn’t fall under the category of penny stocks. There are over 600 companies currently listed on OTC Markets with the OTCQX symbol. The OTCQX Composite stock index tracks almost 500 of them.
OTCQB Venture Market (OTCQB) – this tier is for entrepreneurial and development stage US 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 the $0.01 bid test and may not be in bankruptcy. There are over 1,200 OTCQB members as of today, and all but approximately 60 are penny stocks.
Pink Open Market – this tier provides broker-dealers with a platform for transparent trading and best execution in any security. Usually, there are very few financial standards or disclosure requirements for the companies in this group. However, there are two subcategories in this group that depend on the basic disclosure requirements:
Current – Pink Current stocks relate to companies that manage to subscribe to the OTC Disclosure & News Service and publish current information pursuant to OTC Markets’ Pink Basic Disclosure Guidelines. Basically, they must provide two most recent annual reports and subsequent quarterly reports, as well as an Attorney Letter covering the information for non-audited companies. There are about 7,000 companies that go with the Pink Current symbol as of today, and over 4,000 of them are penny stocks.
Limited – this tier includes companies that meet the minimum requirements under the SEC’s Rule 15c2-11, but have limited disclosure and financial information publicly available. Usually, these companies are delinquent in their filing obligations with the SEC or the Pink Disclosure Guidelines. There are over 3000 companies trading with the Pink Limited designation.
Besides the OTC stocks trading on OTC Markets, which imposes at least some oversight to the listed companies, there is also the so-called grey market, which is the unofficial market for OTC stocks that have been suspended for trading. These stocks are not quoted by broker-dealers due to a lack of investor interest, financial information, or regulatory compliance. OTC Markets lists over 3,000 companies in this group, which go with the “Dark or Defunct” designation.
Why Insider Financial?
We specialize in finding tomorrow’s next big runners today. Our track record speaks for itself:
- ENZC at $.014 before its run to $.958
- ABML at $.07 before its run to $4.90
- ALPP at $.075 before its run to $7.58
- HMBL at $.027 before its run to $7.72
Most often, we show interest in Pink Current and OTCQB stocks, as they have the greatest potential for growth. However, we’re not limited to that. We also show interest in all penny stocks that are gaining momentum, including those trading on OTCQX tier or even NASDAQ and the NYSE.
Here is what we prefer and may recommend to include in your portfolio:
- Companies that are on their way to secure the Pink Current status or have recently obtained it. Usually, these come with great opportunities for investors as they’re only starting their journey.
- Reverse mergers, take place when established private businesses acquire existing OTC shells to go public. Most often, private companies prefer Pink Current shells. International public companies may also be interested in reverse mergers to reach the US market.
- Pink Current, OTCQB, and OTCQX penny stocks with strong fundamentals and a share structure that prevents dilution. Ideally, their share price is gaining momentum amid surging trading volume, which may anticipate a long-term bullish move, especially if it anticipates some major update.
- Companies that are restructuring their business and adopting a new business strategy that seems to guarantee success in the long run. For example, some companies may dump their existing unprofitable operations to tap into innovative technologies, such as blockchain or metaverse.
- Companies that are specialized in a narrow niche and have few competitors. Some of them may hold patents that can help them monetize their unique technology or approach. For example, some biotech companies may provide unique treatments for rare diseases.
- Companies seeking to expand operations and looking for acquisition candidates, especially when they’re already generating revenue and profits.
- Companies whose operations relate to fast-growing trends, such as blockchain, non-fungible tokens (NFTs), metaverse, fintech, artificial intelligence, augmented reality, electric vehicles, and so on.
- Companies with decent fundamentals experiencing an increase in social media presence and visibility.
- Short squeeze candidates that may put pressure on shorts and see their share price exploding.
Insider Financial conducts quality fundamental and technical analysis to find the next big runners BEFORE they rally.
THE FINAL NOTE
We make sure to identify OTC stocks that have yet to make their explosive move. There are plenty of opportunities, and we take our time to monitor hundreds of penny stocks to buy each week, trying to find the best alerts for our subscribers.
Remember, all you need is one or two penny stocks to succeed in order to crush the market averages.
This is why it’s so important to join Insider Financial. The best part is that it’s totally FREE and you can also get the FREE eBook, The Insider Financial Guide to Penny Stocks when you join today!
WHEN INSIDER FINANCIAL HAS A STOCK ALERT, IT CAN PAY TO LISTEN. AFTER ALL, OUR FREE NEWSLETTER HAS FOUND MANY TRIPLE-DIGIT WINNERS FOR OUR SUBSCRIBERS. WE SPECIALIZE IN FINDING MOMENTUM BEFORE IT HAPPENS!
Disclosure: Insider Financial is not an investment advisor and does not provide investment advice. Always do your own research and make your own investment decisions. This article is not a solicitation or recommendation to buy, sell, or hold securities. This article is meant for informational and educational purposes only and does not provide investment advice.