OTC Investing InvV Inv4US

By pjain      Published Feb. 12, 2021, 10:30 p.m. in blog Startups   

OTC BPR, Warnings, Lessons

Companies usually Very Opaque, Unregulated

All trade information is given by the market maker who did the trade. Sadly this means most "official" information about the company is provided "as claimed" by the company.

OTC means there is very little audited information provided to the regulators.

International Auditors/CPAs are Much Much worse than Big Four (which also don't detect fraud)

The Big Four like Deloitte, PwC, etc. also don't detect fraud like in WireCard, etc.

But the International Auditors/CPAs are Much Much worse! Often outright "hire if you rubber stamp".

--- SELECTION ---

Get your Information on Base Company - Liar, Liar, Stocks on Fire!

These companies are not required to provide a lot of information about their finances, their business operations, or their products, as is required for companies listed on the regulated stock exchanges. It's important to take their statements with a grain of salt and do your own research.

BEFORE buying the stock, you should have done your research and actually believed in the company.

Don't rely on "stranger" tips (likely to have an axe to grind short-sellers or pump-and-dump bulls).

Don't trust even "insider friends" as employees are also usually deluded by top management.

Very High Risk

Only use Limit Orders

Avoid sleazy "used car" trading

Avoid low liquidity ADRs

Avoid F symbol - unreliable transfers

Information on these companies needs to be taken very lightly and is a whole different animal, with high potential for losing 50% to 70% easily trading these names. If you are at the level of asking this question reharding the learning curve from the markets, be very careful if not avoid penny stocks and micro caps.

Avoid Shorting OTC stocks

Shorting OTC stocks is just not a good idea due to the high risk potential to your account. There are far easier and safer ways to make money in the market for the following reasons.

  1. Rampant Pump and dump by Shortsellers. You can find big and less known short sellers like Muddy Waters, etc. posting tons of anti-company information about their preexisting shorted stocks. But don't indulge in this game for fools! The overall result is that this market is extremely vulnerable to manipulation (pump and dump).

  2. Lag time of intermediates just not conducive - they will skim the cream of profits! OTC stocks are very thinly traded, which means that there is often no market other than through a market maker, i.e. a penny stock operation that keeps inventory of whatever OTC shares you are looking to buy or sell. Pros who do this do it ON THE FOREIGN STOCK EXCHANGE and wire accounts/orders at high speed and frequency!

  3. Local Regulations/Short-sellers get blocked Also Pros have CONSIDERABLE INSIGHT AND LOCAL CONTACTS often in high places/postings.

  4. Larger "Decent" Brokers make it tough for retail traders. In the West, very few (maybe none) of the big name brokers will allow you to short OTC stocks. This may present as broker policy forbidding shorts on penny stocks is probably a policy reflecting what kind of investors they want to serve.

  5. KYC Regulation limit Broker - Accredited investor? There is the regulatory issue of financial capacity of the investor, the treatment of which is writ in law and regulation. Without getting technical, the vetting of an investor is intended to see if they have financial muscle to take an ass-whipping. If you don’t, your account may be restricted by broker in a CYA as to the kinds of investing you are allowed, or maybe not even opened at all.

  6. SHORTING PENNY STOCKS = Manipulation by Slimy Parties You may find boutique brokers that will allow you to short OTC shares.

    These are specialist brokers who serve the over-inflated egos of amateur investors who imagine they will become rich by playing in the shadows of the larger markets. Those other brokers who serve the investors with more money than brains are the bottom feeders. Those brokers see YOU the same way a Great White Shark sees a seal: “lunch.” Which pretty much tells you that their investors are the ones who live in the slime at the bottom of the pond.

  7. Very high On Margin subject to Margin Calls forced closures! The few brokers that allow you to short OTC will require a massive amount of margin from you. This can be as high as 50 cent shares that a broker will allow you to short, but they will require $2/share of additional margin in cash or other assets. If you want to short 2000 shares, you would need $5,000 in your account as margin (the 50 cents each share costs plus an extra $2 per share, $2.50 margin per share). That's not an intelligent thing for you to do with your trading capital.

  8. There is nobody who will lend you their shares. Or exploding "Call back"

    During my time on the option exchange in Amsterdam there was a share named DAF (basically bankrupt), which all the market makers were short. suddenly it exploded from 7 cents to 40 cents. what happened? the lenders of the shares demanded their shares back on short notice. the market makers were not amused .. so many things can go wrong in trading, but FAR more with penny stocks.

--- Holding and Monitoring ---

There is no such thing as Buy-and-Hold for ANY stocks, but can be very dangerous for OTC stocks.

You can only Buy-and-Monitor and sell-on-Stinking!

Call the Company Investor Relations

If you own shares in a company doing this call their investor relations desk and specifically ask them to be sure.

Delisting of Companies

Penny stocks are legal, but they are often manipulated. Often they are simply established company that's fallen on hard times; got bought out and drained of all its cash/assets.

Basically many penny stocks may not be a real company at all! The problem with penny stocks is that it's often hard to tell which of these situations is true.

Uplisting and Evolution

OTC stocks (penny stocks) are what they are because they fail to meet the listing requirements of the major exchanges.

The OTC stock that just became re-listed, or listed for the first time on a major exchange, just passed a big milestone of compliance. Congratulations if that’s the case. Your research, confidence, and patience have paid off. Or maybe you just got lucky, and there’s nothing to complain about with that.

Uplisting is when shares in a company listed on an OTC exchange uplists to a major exchange like NASDAQ or even NYSE. You still own exactly what you owned previously though symbol might change. You have your shares and the go to the new exchange.

  1. Uplisting is subject to bigger exchange tighter rules and regulation. So usually those shares just became more attractive with more exposure if the company is solid.

2, It may benefit you by having larger institutions attracted to your stock by the new listing.

  1. But be cautiously and celebrate with both eyes open. If increased scrutiny reveals weaknesses, or it is basically a boring/no-movement stocks it will be ignored or worse hammered by the trading community.

  2. Sell Some? If you’ve made money on your trade where a penny stock stops being a penny stock, it’s a reasonable thing to take some profits.

OTC 101 What, Why

OTC stocks (penny stocks) are what they are because they fail to meet the listing requirements of the major exchanges.

In the stock symbol they have the words OTC: or OTCMKTS typically refering to small cap stock and they trade over-the-counter instead of a specific stock exchange.

Tens of thousands of small and micro-capitalization companies are traded over-the-counter around the world. In totality they outnumber the stocks traded on bigger exchange which ironically are shrinking in supply due to buybacks, LBOs, PE-activity and M&A.

OTC stocks are very thinly traded, which means that there is often no market other than through a market maker, i.e. a penny stock operation that keeps inventory of whatever OTC shares you are looking to buy or sell.

Over-the-counter stocks don't trade on a regulated exchange such as the NYSE or the NASDAQ.

  1. Unregulated. In most cases, they're trading OTC because they don't meet the stringent listing requirements of the major stock exchanges.

  2. Over-the-counter stocks are known as penny stocks because most trade for under $1 per share.

  3. The companies that sell them usually have a market capitalization of $50 million or less.

  4. Even mega cap weight stocks of countries which are under USA sanctions, also trade as OTC stocks.

End User Guide to Buying and Selling OTC Shares

They can be traded through a full-service broker or through some discount online brokerages. Purchases of OTC securities are made through market makers who carry an inventory of stocks and bonds that they make available directly to buyers. Some online brokers allow OTC trades. Full-service brokers offline also can place orders for a client.

Watch the Volume

You have to watch the liquidity as characterized by volume so that you can comfortably sell the OTC stock

Beware of Bid-Ask Spread

Since the over-the-counter stocks on the OTCBB are not part of any major exchanges and very THINLY TRADED. This is primarily because OTC stocks tend to be small and volatile.

Most importantly from the trading standpoint, the bid-ask spread is typically larger for these stocks as they typically trade with less frequency than exchange-listed stocks. Only a select few OTCBB stocks successfully moved from the OTC market to a major exchange.

OTC Trading Mechanics and Platforms

All securities traded over-the-counter are, in reality, traded by a web of market makers who input different quotes and trades through a secure computer network that can only be accessed by those who subscribe.

As mentioned, pretty much all of the trading is now done on OTC Markets Group's platforms including OTCQX, OTCQB and OTC Pink. OTCBB still provides market information through FINRA's website, but it is all but obsolescent now.

Real Time Prices, Tracking, BBs

Prices can be tracked through the Over-the-Counter Bulletin Board.

Over-the-Counter Bulletin Board

Bid and ask quotes can be monitored constantly through the Over-the-Counter Bulletin Board (OTCBB).

  1. The over-the-counter bulletin board (OTCBB) was started in 1990 after the Penny Stock Reform Act of 1990 stipulated that the SEC must develop some type of electronic quotation system for stocks that could not be listed on one of the major exchanges. Stocks that traded over the counter were traded between individuals and market makers using computers and telephones. All companies listed on this platform had to file current financial statements with the Securities and Exchange Commission (SEC) or a regulator.

Pre 2000. The original over-the-counter bulletin board (OTCBB) is an electronic quotation service provided by the Financial Industry Regulatory Authority (FINRA) to its subscribing members. It offered MEMBER traders and investors up-to-the-minute quotes, last-sale prices and volume information for equity securities traded over-the-counter.

2005+. Emergence of Discount Brokers like Schwab and Crashing of Trade fees.

2015+ In many ways, the OTCBB is a shell of what it once was in that it has been eclipsed by OTC Markets Group's offerings in the same space.

2019+ Robinhood revolution and Zero - Crashing of Trade fees for OTC stocks as little left for small brokers.

OTC Markets platform

For last decade or more, pretty much all of the trading is now done on OTC Markets Group's platforms including OTCQX, OTCQB and OTC Pink. OTCBB still provides market information through FINRA's website, but it is all but obsolescent now.

When you see OTCMKTS, that means whatever security you are looking at trades specifically on the OTC Markets platform. OTC Markets is a company that provides a market place on which over-the-counter stocks in the US can list and be traded (much in the same way that Nasdaq or NYSE are companies that provide a market place for publicly listed stocks in the US to trade).

Companies often like to list OTC 1. Requirements are far less stringent than what the SEC requires to list stock on a national market exchange. OTC Markets has several different levels of listings, which generally relate to how legitimate of a company each listing is. You can read more about their listing tiers on their website. On the downside, lower prestige than being listed on a major exchange carries more than being on the Pink Sheets.

  1. Provide Shareholders Liquidity instead of "Private Placements". Once you have more than a few dozen shareholders, you cannot keep going to the treasury and buy-sell.

  2. Avoid Second/Private market Fees.

  3. Much lower cost of being listed on a major exchange versus the “Pink Sheets” as they’re called, i.e. OTC, because the stocks were once printed on pink paper for distribution to brokers.

  4. Garage-Cos to Smaller Cap Companies with little liquidity. Markets equal liquidity, more or less, or daily trading volume, with arbitrarily speaking, more liquidity on the major exchanges. A lot of small companies that go public are really, really small, like two people working out of a garage. They went public in the hopes of getting enough revenue to make their startup a going concern, for example, but just can’t turn their idea into a saleable product. The Pink Sheets have a lot of these kinds of companies. A lot.

  5. Manipulators are all over OTCs. Naturally, these companies prefer the Pink Sheets because the regulation is far more lax (and the opportunities for fleecing the public are much greater).

(a) Figure an angle, e.g. Zoom is hot, so they claim unique software for video telephone pulled eg WebRTC for free off the web hawking a few sales (b) There’s folks who are pimping a commodity product using their people or sales skills. Use boards, Internet PR, Twitter etc. to build momentum (c) Build "fake sales", shipping bricks, etc. showing rapidly growing sales from small bases. (d) Fleece the public in the IPO and Get suckers to buy their stock (e) While stock PE is high, sell stocks (f) Meanwhile suck every last nickel out of the company in salaries. This illustrates how promoters drain the company - “my sister runs a cleaning company and we hire her to clean our vast warehouse (their garage) and pay her $5,000/mo to do so, and my mother does our bookkeeping, and my dad is an engineering consultant, and well, you get the picture. (g) Often these are repeat offenders with deep broker and Wall street contacts to pump-and-dump. So they’ll be back again to create another gravy train. It happens. A lot.

All of which is why investors who are serious about their investments avoid penny stocks and stocks that are not listed on the NYSE, old AMEX (whatever it’s called now, but rolled up into the NYSE) or the NASDAQ. All the rest are just sucker’s markets.

F Foreign Traded ADRs and transfer cross-border are unreliable and inaccessible

The symbols ending with F are not ADRs, but foreign ordinary shares trading on OTCBB / Pink Sheets. (The ADRs end with a Y.) Generally, these equities trade because some people want to trade them, but no one has bothered to create an ADR yet. To trade a …F equity, you need to convert your dollars into foreign currency to pay for it. Some stock brokers charge more for this, and some refuse to do it at all. Dividends too are paid in foreign currency.

For example SoftBank (Japanese investment firm) has both Y and F - SFTBF - is a FOREIGN STOCK listed on Tokyo Stock exchange 9984.T but forex in USD and available to US citizens. - SFTBY is a derivative unsponsored, and represents 1/2 of ordinary share)

Why does my broker give an error "Foreign OTC securities (5-letter symbols ending in F) are not available for trading’? F is the foreign share itself. It is bought in its home country and transferred to what country you and/or your broker is. As you can see since the trade is done outside the US it is more complicated and riskier. It is subject to fraud as it is not unusual for someone to fill the order and not transfer the shares. You are not protected by US securities laws on this trade and some brokers won’t touch it.

Y ADRs - Ticker is the same but has “Y” in place of the “F”

Many foreign stocks have an American Depository Receipt or ADR. Those are US versions of the foreign stock, but the shares are already in the US and subject to US laws. > Not every stock has an ADR, but your broker can trade that one confidently. I worked at Merrill in the mid 80s, then Shearson, Smith Barney until a few years ago, they both traded overseas. It does have different risks though, hence many use the ADR.

One reason it is better to wait for an ADR (sponsored or unsponsored) to show up eventually is an indication that enough people want to trade and are willing to pay a small fee for the operational hassle of currency conversions.

Why invest in OTC?

  1. Pennies to Dollars? Penny stocks attract among investors who like getting a large number of shares for a small amount of money. If the company turns out to be successful, the investor ends up making a bundle. If it doesn't, the loss is, hopefully, a small one.

  2. Discover hidden wonders. Investors are attracted to the outsized returns that can still occur the OTC market as some of these firms do find ongoing success and outsized profits.

  3. Problem of NCAV rare, Cigar Butts!

OTC Trading Mechanics and Platforms - How they Work

Why "Proper" Western Companies list on OTC

For small companies that cannot meet the listing requirements to trade their securities on national exchanges, the OTCBB was an important alternative and the current offerings of OTC Markets continues to play this role.

Small companies need financing from investors even to grow, even though their total market value might never rival a mid-cap stock. While these companies use the OTC markets in place of one of the major exchanges, it is important for investors to remember that the OTCBB and OTC Markets are not, in fact, an actual exchange but merely a quotation service.

Private Equity, Mezzanine, VC capital FREELY AVAILABLE after 2009 Central Bankers

Listing for Cross-Border Liquidity for Emerging Country Promoters

Role of Large Global Banks

How Intermediaries "Market-Makers" trade on Specialist KNOWLEDGE - how they make money

OTC markets are over-the-counter markets. Not limited to stocks but these are markets where generally large banks act as dealers (not unlike car dealers) where customers go to centralized locations (dealer desks) to transact.

Custom Derivatives

Basically these are derivatives custom made for individual foreign stocks. They are like used car dealers where you can pick the make and model if custom variations are available. This essentially is the customization of OTC derivative contracts.

Proprietary Holding inventory

And yes OTC dealers hold inventories, be it derivatives or bonds. This is not like market maker in stock market where they MATCH buyers and sellers. And yes sometimes they take a pound of flesh...

OTC Brokers Comparison

Some stock brokers dont allow buying those types of foreign securities. Call you broker directly or if you must, open an account with a broker such as interactive brokers that allow buying OTC shares.

Commissions and Fees

Trade surcharges

Many brokers add a surcharge to stocks that are valued under a certain dollar amount. Because many penny stock trades involve a large number of shares, look instead for a broker that charges a flat commission. This will almost always save you money.

Volume restrictions

The best penny stock brokers will allow you to trade unlimited shares without additional fees, but a few charge more for large orders. Some brokers also limit the number of penny stock shares you can trade in one order or in one day, forcing you to pay another commission fee and slowing down your trading strategy.

Trading restrictions - more expensive phone only

Ideally, your penny stock broker will allow you to trade penny stocks with its online platform, just as you would a standard stock. Watch out for firms that require you to trade penny stocks by placing a phone order, or impose limits on the types of trades you can execute. For example, many brokerages don’t allow customers to short penny stocks, and some don’t trade stocks valued under a certain amount.

Doing your Research

  • Check FINVIZ's free screener to find stocks to trade

  • YAHOO/finance often gives you a wide range lot more than finviz, etc. where you can get intraday chart of course probably with delay of 15 minutes while you need to subscribe for live quotes, but for this you would need broker.

  • For OTC, otcmarkets.com is the place to get quotes!

IBrokers best for OTC?

You may be best off opening an account with a broker such as interactive brokers that allow buying OTC shares.

Interactive Brokers ranks as the best online brokerage for short selling and offers the lowest margin rates in the business. ...

I use this broker my self. They got good rates, great locates (shares to short) and have connection with many major ECN and exchanegs to tap for best liquidity.

TDAmeritrade X medium fees - subject to change as Schwab owns it now!

Schwab X is the Worst for OTC, After-market

As of Feb 2021, Schwab charges $50 fee each way for OTC stocks eg those 5 alphasymbols ending with ‘Y’ or ‘F’. Its acquired TD-Ameritrade for the most part has $6.95 each way. Also I think most brokers with “FREE” trading actually make their money under the table for order flow. In these thinly traded stocks, these high fees, means there is no value in the order flow.

ETrade - nothing special - only for High Frequency traders

E*TRADE pricing structure becomes less expensive than AMTD and Schwab after 313 trades per quarter, however. If you’re an active trader and regularly hit those numbers, that will be your best option.

Center Point Securities.

If you have more than 50 000$

Robinhood

I use this to trade penny stocks. 100% commission free!

Citadelsecurities.com - major order flow supplier and Dark Pools

TradeStation

TradeStation's platform used to only be best for professional traders who needed a highly technical platform. ...

Firstrade tiny

Specialized for high frequency traders.

TradeKing

For example, TradeKing tacks on an extra 1 cent per share for stocks valued under $2, in addition to the company’s standard $4.95 commission. If you trade 500 shares of a stock, this will add $5 to your trade. Be sure to ask about any additional fees before making a decision, and keep in mind that different brokers have different definitions of penny stock. Some consider anything trading under $5 to be a penny stock, while others put the cutoff at $3 or $1.

Zacks Trade - tiny

OTC Regulations by Country

USA

Europe

UK

China

India


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