OTC Stocks Explained – Difference Between OTC Stocks and Listed Stocks


OTC stocks explained – difference between OTC stocks and Listed stocks
OTC stands for Over the counter another name for some of these stocks is pink sheets. You might recognize the term pink sheets from the wolf of Wall Street, where Jordan Belfort was quote unquote selling garbage to garbagemen. And that’s exactly what these stocks are, garbage. Please do me a favor right off the bat and do not believe in OTC stocks.

As for Listed stocks, the term listed refers to a stock being listed on a major exchange, namely in the US that would be the New York Stock Exchange and the NASDAQ. If you’re watching this video because you are curious about day trading, then chances are you already have heard about the new York stock exchange and the nasdaq. And you at least know something about them, this video will help fill in the gaps.

The first Difference is transparency. With listed stocks there are a lot of hoops to jump through when it comes to filing with the SEC, having a track record, and qualifying for the exchanges. This is a lengthy process, and is very expensive. its not uncommon for companies that want to go public to have to give up a double digit percentage of their equity. With all the additional people you have to hire, the investment banks that help you prepare to get listed, if you have a 10 billion dollar company, depending on how tight you are, it could easily cost you a billion dollars, maybe more, just to get your company listed on the NASDAQ or the NYSE.
Whereas with the OTC Markets, there is a lot less paperwork, less time required to prepare for your company to go public, less expensive, and overall just less hoops to jump through. This leads to, in my opinion, the biggest drawback for OTC stocks, and the main reason why you don’t want to hold any of these stocks for an extended period of time. And that is Lack of transparency.

When you have two options OTC and Listed and the listed route is going to make you jump through more hoops, cost more money, and provide extra documentation, its clear to see that the listed route is reserved for larger, well established companies. Its the big leagues, think of your Johnson and Johnson’s, your cocacola’s, your apples. These are all examples of listed companies. These types of companies are held to a higher standard and because of that are more suitable for long term positions. On the other hand you’ve got your OTC stocks, these are smaller companies, that for whatever reason chose not to be a listed stock, whether that’s because they don’t have the money, they don’t have a good financial track record, or they are just flat out are up to no good, and would prefer the OTC Markets where they are allowed to be much less transparent. It doesn’t matter why a company chooses to go the OTC route, just the fact that they chose OTC instead of listed, most people are going to interpret that as the company either has far less capital to work with, or would prefer to be less transparent, which is never a good thing. These are not investments, these are more suitable for trades, specifically day trades, with the occasional overnight trade. Nothing long term.

The next major difference between OTC and Listed is liquidity. There are more large scale participants in listed stocks, when I say large scale I mean hedge funds, market makers, and algorithmic traders. It’s called high frequency trading. these are machines that can place thousands of trades per second. What this does for the day trader, people like us, is it allows for extremely fast executions on your orders, and typically results in zero dollar commissions from a lot of the major US brokers. The downside to this for listed stocks, is it can make these stocks move in either direction at lightning speeds. Think Gamestop and AMC in the beginning of 2021. These are both listed stocks.

OTC on the other hand is overall less popular, and that might be because a lot of brokers charge a flat fee of around $7 per order in the US, but the one upside, and in my opinion, its a huge upside, OTC stocks tend to move slower than listed stocks, allowing for humans to compete with other humans, and not just you against a hedge fund that built a computer to trade for them. There is more of a human edge with OTC stocks, in my opinion, And that’s why I prefer OTC stocks for day trading, and I prefer Listed stocks for long term investing.