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Whether you’re an avid participant in the stock market or you’re simply trying to earn supplemental income to deposit into your bank account, you should have a general understanding of the stock market and types of stocks before you decide to purchase stocks. As of late, one type of stock, OTC stock, has become increasingly popular across the country. The “OTC” in OTC stocks means over-the-counter. What makes OTC stocks different than regular stocks is that they aren’t sold or traded on an official stock exchange, but rather through other informal platforms.

The major appeal of OTC stocks is their price tag. OTC stocks are often considered “penny stocks” because of their relatively low financial value. Unlike regular stocks you may find on the stock exchange, most of these stocks are valued below $5 per share, meaning you can purchase a greater number of shares and potentially reap greater financial benefit. They also allow you to become involved in stock trade without depositing an exorbitant amount of money. Below, we will overview what OTC stocks are, the benefits they possess, and how to purchase these stocks.

How to Buy OTC Stocks

Purchasing OTC stocks is a relatively simple process, but because it does not involve participating in major stock exchanges, it can be a bit more complicated than other types of investments. The process involves:

  1. Finding a stockbroker
  2. Funding your account
  3. Determining which stocks you wish to buy
  4. Purchasing the stocks

Find a Stockbroker

When it comes to OTC stocks, you have two options when picking a stockbroker: full-service and discount. While both types of stockbrokers can ultimately lead you to your goal of purchasing stocks, they both have their own pros and cons.

Full-Service Brokers

Full-service stockbrokers truly live up to their name, as they can assist you with any of your financial needs related to the stock market. Perhaps the greatest benefit of working with a full-service broker is the expertise required to enter the profession. Not only are these individuals formally educated and licensed in the field, but they are also more qualified to make financial and stock decisions than other brokers and yourself.

Though you undoubtedly have less freedom when it comes to full-service brokers because they will be making decisions for you, there is a higher chance that you will profit more financially. Because of the increased chance of success when working with full-service brokers, you will be paying more out of pocket to work with them, and you may be charged a flat rate for each trade the broker makes on your behalf.

Discount Brokers

Discount brokers are more often found online and generally offer greater freedom when it comes to purchasing stocks. Essentially, discount brokers work on your behalf and purchase and trade stocks at your request, unlike full-service brokers who make an educated choice for you. When working with a discount broker, you have full control of your potential profit and loss in the stock market.

As the name suggests, discount brokers are much cheaper to work with than full-service brokers, which makes them an excellent choice if you’re trading and purchasing stocks on a more frequent basis. Additionally, if you have background knowledge in stocks and the functioning of the stock market and are simply looking for access to the stock market, then a discount broker would be your best bet.

Fund Your Account

Now that you have a broker, it’s time to fund your account before you can officially begin purchasing OTC stocks. The first step in this process is opening a brokerage account, which gives you the authority to purchase investments like stocks.

The amount of money you put in your brokerage account is dependent on your personal preferences and how much you intend to invest in stocks. Many experts suggest putting about 10% to 15% of your paycheck into a retirement account. If you would rather invest a percentage of your paycheck in stocks, you have the choice to do so.
You should first consider how much you can afford to put into your account before actually funding it. Another major component of funding your account is ensuring that the amount you deposit is adequate enough to buy at least one share of stock.

If you are purchasing OTC stocks, you will need significantly less funding to purchase at least one share, as compared to stocks on the New York Stock Exchange that are worth hundreds or thousands of dollars. However, you should also take into account that OTC stocks are a greater risk and more difficult to sell.

Research OTC Stocks

Once the financial aspect is covered and your account has been funded, you should begin researching which stocks you would like to invest in. Some things you should consider before purchasing stocks, especially in large amounts, are the price per share and the stock’s financial trend.

Price Per Share

Price per share varies from stock to stock and can greatly impact how many shares you purchase with a set amount of money. For example, when it comes to OTC stocks, you might be able to purchase some stocks for $5 and others for $0.50. If you had one share of each and they both increased in value by 10%, the first stock would yield you an additional $0.50, while the other would bring in $0.05.

Though these values do not seem significant with one share, they can result in a great financial impact if you own multiple shares. If you owned 20 shares of a stock and the stock dropped 50% in value, you would take more of a financial hit than if your shares were spread between multiple stocks.

Stock Trends

Once you’ve determined which stocks you might be interested in, you should review the financial trend of the stocks to determine if they would be a good investment. If you notice that at stock is constantly fluctuating in value, you might not gain much financially by investing in this stock. However, if a stock is consistently increasing, it may yield more profit in the near future.

Another method of purchasing stocks includes purchasing them after they have declined significantly in value. If a stock has been valued at $5 in the past but is currently valued at $3, it shows the financial value the stock is capable of attaining and thus, might set you up for guaranteed profit. This is not an exact science and is simply a strategy that could be used.

The most important thing you can do is keep track of a company’s behaviors and products and how these impact their stock. For example, if a company’s stock increases considerably when new products are released, and you notice that the company will be releasing new products within the next month, you might want to purchase several shares before the product release.

Purchase Stocks

The final and perhaps most important step in the process is actually purchasing the stocks. Because OTC stocks are not included in major stock exchanges, your broker will handle the trade on an official OTC stock trading platform or within the brokerage itself. To initiate the process of purchasing an OTC stock, you would notify your broker of your interest.

Once your broker has received your request, they will contact the associated parties and begin the trade process. The first thing your broker will do is attempt to trade the stock internally, which means they will try to fulfill the request within the brokerage (another person in the brokerage is looking to sell their share of a stock you are interested in purchasing).

If a broker cannot find another client within the brokerage, they will seek a trade outside the brokerage. If your trade offer is accepted, your broker will manage the finances in your brokerage account to pay for your shares. You now own OTC stocks. If you intend on selling or trading these stocks, you would again return to your broker and discuss this matter.

Final Thoughts

If done strategically, purchasing OTC or penny stocks can be a great investment tool used to supplement your income and line your wallet. However, it is of grave importance that you follow each step of the process accurately in order to protect yourself financially and yield the most profit.

Here are some things to keep in mind before beginning the process:

  • Determine how involved you would like to be in the process and how much you are willing to spend to hire a professional.
  • Fund your account to enable you to purchase your intended amount and value of stocks.
  • Research stocks within your price range and decide which stocks hold the greatest potential in terms of value increase.
  • Communicate with your broker and notify them of the OTC stocks you intend to buy and what you’re willing to spend on them.

We offer webinars to help you learn more about trading stocks. If you need more help feeling comfortable with OTC stocks before jumping in, consider signing up so you can ask any remaining questions you have. 

Author:
Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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