![]() ![]() The dangers lurking in OTC stocks far outweigh the vanishingly small potential for rewards. And even legitimate tiny companies can fail virtually overnight. It’s simply not possible for the average investor to know if every OTC company is on the up and up. The bottom line is that with the exception of large, established foreign firms, OTC stocks come with too many risks. In sum, the OTC market can give foreign firms cheaper and easier access to the vast pool of U.S. Companies trading OTC avoid the burden and expense associated with such compliance. That means they must prepare two sets of reports for all financial disclosures – one to conform with international accounting standards and another that follows the generally accepted accounting principles (GAAP) used in the U.S. Foreign firms listing on the NYSE or Nasdaq must adhere to the SEC's stringent reporting requirements. The reason has to do with cost and convenience. Why would major, international publicly traded companies rub shoulders with firms that issue highly speculative penny stocks? If You'd Put $1,000 Into Adobe Stock 20 Years Ago, Here's What You'd Have Today You also can buy shares of Switzerland’s Nestlé ( NSRGY), the largest food company in the world China’s Tencent ( TCEHY), one of the country’s largest internet service providers and Japanese gaming giant Nintendo ( NTDOY). ( IDCBY), which happens to be the biggest bank in the world. Here, you’ll find the American depositary receipts of The Industrial & Commercial Bank of China Ltd. shares over-the-counter instead of on the major U.S. Legitimate "penny" stocksīe that as it may, there is one segment of the OTC market that investors need not fear.Īmidst the riff-raff, some of the biggest, most respected foreign companies in the world list their U.S. Since that rarely happens, trading suspensions can essentially render the shares worthless. Once a stock has been suspended from trading, it cannot be relisted unless the company provides updated financial information to prove it’s actually operational. To protect investors from falling for these schemes, the SEC suspended trading of more than 800 microcap stocks – more than 8% of the OTC market – between 20. Once the price gets high enough, the pumper sells his shares, causing the stock to fall and leaving investors with poor returns, or even losses. That lack of liquidity also makes many OTC stocks the perfect vehicles for “ pump-and-dump” schemes where stock promoters lure investors to buy shares, increasing the stock price. That can make it difficult or impossible for investors to buy or sell shares at the prices they want. The shares that change hands on the OTC market tend to be “illiquid,” meaning they often trade in low volumes and have a limited number of buyers and sellers. ![]() Put it all together, and it makes it easier for unscrupulous managers to lie about their business prospects or commit securities fraud.īut that’s not all. The OTC market makes no such requirements. For example, a company must have at least 400 shareholders and a market value of at least $40 million to get a listing on the New York Stock Exchange. The major exchanges also have listing requirements OTC stocks don’t. In other words, there’s no way to know if they’re telling the truth when they claim to have sales and profits. That’s because companies that list OTC aren’t required to file periodic or audited financial reports as they must do if they are listed on a major exchange, such as the NYSE or the Nasdaq. The Financial Industry Regulatory Authority (FINRA), the industry’s self-regulatory agency, likewise flies a red flag over the buying and trading of OTC securities. The SEC has long warned investors about the high risks associated with such stocks. This also includes nanocap stocks (those with market values of under $50 million). Typically, OTC stocks tend to be highly risky microcap stocks (the shares of small companies with market capitalizations of under $300 million). These securities also are known as “unlisted stocks.” Any stock that does not trade on the NYSE, Nasdaq or other established U.S. Instead, the OTC market connects buyers and sellers over a computer- and telephone-based system. For some background, the OTC market is different from exchanges like the New York Stock Exchange or Nasdaq, where trading is centralized.
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