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Over The Counter Trading Of Stocks
Stock offerings of companies that are too small to be published on the major stock exchange boards are usually traded via over the counter transactions on the Over The Counter Bulletin Board (OTCBB) and Pink Sheets. While securities on the big boards are traded through outcry auctioning, those on the OTCBB and Pink Sheets are negotiated directly between sellers and buyers, either through an online internet network or via telephone.
There is a major difference between over the counter trading and trading in the stock exchanges. In the NYSE, for example, during the trading process everybody in the whole trading area knows how many shares changed hands, and how much the share was sold. Very soon the entire world gets to know the information as the stock prices are spread through the business dailies and stock investment websites.
In negotiated trading of over the counter stocks, the transaction is a one-to-one dealing between the buyer (you) and the broker, and there is usually very limited information available apart from what your broker will tell you as to the current price of the stocks. There is also a greater time delay involved in disseminating the information.
In over the counter trading, the buyer does not deal directly with the owner or seller of the stocks, but with the broker. Brokers will usually have a wide variety of penny stocks in their portfolio, and buyer can choose among these. The broker/dealer will have two prices, the bid price and the ask price. The bid price is the price that the dealer is willing to pay the seller for a share of the stock, while the ask price is the amount he is willing to sell the share for.
When you buy shares of stock and you negotiate with the broker, he will quote you a bid price that you may either agree to, or haggle on. The actual price of the stock will be anywhere between the bid price and the ask price, and the difference between your final agreed price and the price the broker and the seller agreed on is called the spread.
Over the counter trading primarily deals with stocks and bonds. Any company can sell its securities through over the counter trading. In the stock exchange boards, companies must apply and be approved for listing by the boards, who regulate which companies are approved for trading. Reporting regulations between the stock exchange board and over the counter boards are also different exchange boards have more stringent rules.
Companies on these boards must meet a certain level of annual net income, as well as minimum number and value of shares being traded. Thus, the smaller companies and those that are not quite stable are usually traded over the counter.
Over the counter trading is regulated by the National Association of Securities Dealers (NASD), which sets the rules, and moral and ethical standards that its members must follow, as well as procedures for trading.
Companies that are just starting out, that prefer to be unlisted, or those that have suffered financial setback and been downgraded are the ones you will usually find on the over the counter boards. While there is a heavier amount of risk involved in over the counter trading, it is a venue where many new and promising companies start out. Through careful research and analysis, it is very possible to find company that is a diamond in the rough that can be a lucky find for the penny stocks investor.
About the Author Nir Dotan is a writer and promoter of OTC Stocks services, and OTC Stocks Preferred source for the latest news and information on the best and brightest OTC Stocks. |
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