Most stocks are traded on major exchanges like the Toronto Stock Exchange, the New York Stock Exchange and the Nasdaq. But some stocks aren’t listed on exchanges and are instead traded “over the counter” (OTC).
So, what are OTC stocks, how can they be traded, and what benefits and risks do they have for investors? Keep reading to find out.
What are OTC stocks?
OTC stocks don’t trade on centralized exchanges like the NYSE and TSX. Instead, these stocks trade through networks of dealers or brokers, with trading handled directly between the buyer and the seller.
There are a few different reasons why stocks trade over-the-counter. In some cases, it’s because they’re new companies and still relatively small. If they don’t meet the requirements to be listed on a major exchange—such as minimum market cap or share price requirements—they trade OTC instead.
Other stocks are listed on OTC markets because companies have been delisted from major exchanges or because it’s a cost-effective option that allows them to avoid the expensive reporting requirements of major exchanges.
You can also find a host of major foreign companies listed on OTC markets in the USA. Trading OTC allows these big international companies to access US investment money while avoiding the cost and strict regulatory requirements of listing on major US exchanges.
Can I buy OTC stocks in Canada?
Yes, several brokerage firms let Canadians trade OTC stocks. However, not all trading platforms provide access to OTC markets, so you’ll need to research available markets when choosing a broker.
Check out the comparison table below for a rundown of the platforms that offer OTC stock trading in Canada.
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The biggest advantage of OTC stocks is that they offer the potential for significant growth. Because these stocks are often startups or don’t tick all the boxes required to be listed on major stock exchanges, you can gain exposure to emerging companies.
Pick the right investments, and you could enjoy better returns than you might get from buying established blue-chip stocks. But just be aware that the potential for high rewards comes with a high level of risk.
Trading OTC markets also provides a way to diversify your portfolio by gaining exposure to a variety of different assets. Some are penny stocks, but others are major foreign companies. For example, browse the OTC Markets Stock Screener, and you’ll find well-known names like:
OTC Markets Group is a US company that operates markets for over 12,000 OTC stocks. It splits OTC securities into four different market tiers based on the information that these companies provide to investors:
OTCQX Best Market. This market features established, investor-focused US and international companies. To qualify, companies must comply with US securities laws, meet certain financial standards and follow best practice corporate governance. Penny stocks cannot trade on this market.
OTCQB Venture Market. This market tier is for newer US and international companies at the developmental stage. Companies need to be current in their reporting and complete verification and management certification each year.
OTCID Basic Market. Companies listed on this tier only provide basic reporting information to investors and don’t meet the stricter requirements to be listed on the Best or Venture Market.
Is it risky to buy OTC stocks?
Yes, buying OTC stocks comes with a much higher level of risk than investing in stocks that trade on major exchanges. Here’s why:
Limited information. Due to their limited regulation, OTC stocks don’t have to meet the same strict reporting requirements as companies that list on major exchanges. This means you can only access limited financial information about companies that trade OTC, so there is not as much transparency for investors compared to buying regular stocks.
High volatility. OTC stocks are generally highly volatile, so you can lose money quickly if the price of a stock moves against you.
Low liquidity. OTC stocks have low trading volume, so it can be difficult to sell your stocks quickly if you need to.
Pump-and-dump scams. Due to the lack of regulation of OTC markets, they’re a common target for pump-and-dump schemes. This involves scammers buying a lot of a particular stock, spreading false information to artificially inflate its price, then selling all their stocks for a profit—leaving innocent investors to take the price losses that result.
Potential to lose money. If a company goes bankrupt or ceases trading, you could lose all the money you invest.
With this in mind, it’s important to:
Do your research. Make sure you thoroughly research any OTC stock before deciding whether you should invest.
Not over-commit. OTC stocks should usually only ever make up a small percentage of your total portfolio, and you should only invest with money you can afford to lose.
How to buy OTC stocks in Canada
If you want to invest in OTC stocks, here’s what you need to do:
Step 1: Choose a trading platform
Compare online trading platforms to find one that’s right for you. The broker you choose will need to provide access to OTC markets. They should also have low or no trading commissions, provide access to any other assets you want to buy, and offer a user-friendly trading experience.
Step 2: Open and fund a brokerage account
Open an account by providing your personal information, contact details and proof of ID. When the account is set up, transfer funds over from your bank account so you’re ready to start trading.
Step 3: Choose an OTC stock
Research OTC stocks to choose which one you want to buy. Check the company’s financial statements, history, growth plans, leadership team and more before deciding if you want to invest.
Step 4: Place a buy order
Log in to your trading account and search for the stock you want to buy. Due to the potential volatility of OTC stocks, it’s generally recommended that you use a limit order so you can avoid getting stuck with a poor execution price.
Bottom line
You can access a host of unique opportunities by investing in OTC stocks, but only if you’re willing to accept a high level of risk. You’ll need to thoroughly research any OTC stock before investing, and make sure that OTC securities never make up too large a percentage of your portfolio. But if you’re ready to get started, compare online trading platforms that support OTC stock trading.
Frequently asked questions
Penny stocks are typically traded OTC, but not all OTC stocks are penny stocks. There’s no official definition of what constitutes a penny stock, but they are usually newly listed companies with market caps of less than $300 million, and they typically trade for less than $5. Learn more in our full guide to penny stocks.
Typically, no. OTC stocks are not traded on designated exchanges, so they are usually not eligible to be held within registered accounts such as TFSAs. However, if a stock is also cross-listed on a designated exchange, you may be able to invest in it through a registered account.
Pink sheets is another name used to refer to OTC stocks. This is due to the fact that OTC Markets, which was originally known as the National Quotation Bureau (NQB), listed the prices of stocks and bonds on pink and yellow papers. The NQB was renamed Pink Sheets LLC in 2000 and then became OTC Markets Group in 2011.
Canadian investors can access thousands of OTC stocks. OTC Markets Group in the USA allows you to trade over 12,000 American and international OTC stocks.
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Important information: Powered by Finder.com. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider the Product Disclosure Statement and Target Market Determination for the product on the provider's website. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.
Tim Falk is a freelance writer for Finder. Over the course of his 20-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
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