Over-the-counter (OTC) stocks can easily be bought online. It is necessary to realize that OTC stocks represent smaller companies that are less often followed by brokers. Thus, information about the company may be harder to obtain. OTC stocks are more thinly traded, so exercise caution when buying and selling these stocks.
Research possible online accounts (see Resources). Consider your needs. Will you need access to independent research? Do you need to consult staff for individual help? All brokers will trade on any exchange, and your account will be insured up to $100,000 with the SIPC (Securities Investor Protection Corporation). If you are an active trader, pay close attention to brokerage fees.
Be certain the broker you choose has the ability to trade penny stocks, listings for very small (bulletin board) stocks and NASDAQ stocks. Open two accounts in case Internet failures make it hard to reach a particular broker. In addition, you will have more access to independent research.
Trade OTC stocks with caution. Do not place large orders, as these stocks are thinly traded, small capitalization stocks. Prices will rise with little trading volume. Note the spread or difference between the bid-and-asked price. Only dealers can trade between the bid-and-asked price, so you will need to buy stock when it is being sold or take the offered price. Be patient and accumulate your stock over time.
Use the stock research available online through your broker and through paid subscriptions to Internet services. Look for stock in healthy industries with good cash flow and a mix of products appropriate to the company's prospects. If you are uncertain how to diversify, you can buy indexes of OTC stocks for the Russell 3000, the Russell 2000 or the NASDAQ. Diversify stock purchases by various industries and do not buy more than two stocks in any one industry.
Place your order online and use mental stops. Stops represent money management controls, whereby the investor acknowledges prior to the trade how much money she is willing to lose before the stock is sold. The online trader will allow you to enter automatic stops. But if you enter these stock stops, it will be known by all broker-dealers and leave the stock at risk in after-hours trading. If a stock drops below your mental stop, sell the stock the next morning. Use sell stops when a stock has reached your profit targets.
Trade OTC stocks for long-term prospects. The large spread between the bid-and-asked price plus the brokerage taxes and trading costs make day trading of OTC stocks an expensive proposition. Day trading is better left to large capitalization stocks on the New York Stock Exchange.
Practice-trade before investing real monies. Learn your own risk tolerances for investing.
- U.S. Securities and Exchange Commission. "Penny Stock Rules." Accessed Aug. 19, 2020.
- U.S. Securities and Exchange Commission. "Microcap Stock: A Guide for Investors." Accessed Aug. 19, 2020.
- InteractiveBrokers. "Home." Accessed Aug. 19, 2020.
- TradeStation. "Home." Accessed Aug. 19, 2020.
- Zacks Trade. "Home." Accessed Aug. 19, 2020.
- Practice-trade before investing real monies. Learn your own risk tolerances for investing.
After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.