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Trading In Over The Counter Stocks
Over the counter trading is a form of direct trading between two parties, the buyer and the seller. Stocks, bonds, derivatives and commodities can be bought and sold through over the counter exchanges.
A distinctive feature of over the counter trading is that the transactions are not conducted through a formal exchange.
In other words, transactions need not occur at a single physical location like the stock exchange but can happen through the telephone or Internet. It can also represent transactions that happen through a dealer-network. However, in the US, over the counter trading is done through OTCBB and Pink Sheets securities.
Over The Counter Traded Securities
Over the counter traded stocks are primarily penny stocks that are not listed in other stock exchanges. In general, these companies are very small and they will not meet the listing requirements of stock exchanges. So, they are transacted by brokers over the phone or Internet.
Many bonds are not traded on the formal exchange. The investment banks that issue these bonds do so for a specific purpose and the investor must contact the bank to buy or sell them. Even the quotes have to be got directly from the banks only.
OTCBB
Over the counter Bulletin Board is an electronic system that displays the latest quotes, volume and last-sale price of OTC stocks. OTCBB is monitored by The National Association of Security Dealers (NASD). Although NASD also owns NASDAQ, OTCBB is not a part of NASDAQ.
The stocks traded on OTCBB have to comply with some requirements as specified by the SEC. However, Pink Sheet securities have no such requirement. The stocks traded on OTCBB have the suffix. OB, while pink securities have the suffix. PK.
Over the counter trading has a lot of potential for making profit. However, the investors must be very careful because it is very risky and is a common place for frauds. In many cases, investors can even loose their entire investment.
A common fraud associated with over the counter trading is called Pump and Dump. The fraudsters will buy a penny stock for a very low value. These people will resort to email and telephone marketing to boost the value of their stocks. Innocent investors, taken by these marketing gimmicks, will buy the shares and this will push the price up.
Once the price goes up, the fraudsters will dump the stock and make money while the innocent investors end up losing most or sometimes even all of their investment. According to a research conducted by Jonathan Zittrain and Laura Frieder, these innocent victims end up losing around 5.5% in just two days.
Investors should be wary of the stocks traded in over the counter exchanges. These companies are small with limited operations. Investors should be aware of the high degree of risk involved before investing. A thorough research about the background, financial health, management, operations and earnings history of the company must be done before investing. However, the right company can provide huge rates of return.
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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