If you are trying to start investing in the stock market, you have a lot of stock market terms to learn. You may have heard of the bull and bear markets, market caps, and more, but some terms are a bit more obscure than others are.
One of the more obscure things people will quickly pick up on is that there's not just one stock market. You can invest in the Philippine Stock Exchange, the NYSE, or the London Stock Exchange—just to name a few.
Most exchanges are named after the country they originate in, but not the OTC. The OTC, also known as the OTC Pink, is a stock exchange unlike any other. But, what is it?
What is the OTC, anyway?
The OTC is a decentralized market where people buy and sell stocks that aren't found on major stock exchanges like the NYSE. Unlike the regular stock exchange, the stocks that are bought through the OTC are sold by specialized distributors.
OTC stands for "over-the-counter," a euphemism that tends to suggest a slightly less regulated market. The OTC exchange is, and currently has three different levels of speculation associated with it.
So, what's with all the speculative levels, anyway? You're probably curious what the "pink" part of the OTC is, and why that matters to investors, right?
The OTC has three different tiers, all separated by the amount of speculation involved.
The three tiers of the OTC are the OTCQX, the OTCQB, and the OTC Pink.
The OTCQX has the strictest reporting guidelines of them all, with many companies being top-selling corporations in Europe, China, and Brazil. It's often called the "OTC Best" because of the reputation these companies have. Bankrupt companies, shell stocks, and penny stocks cannot be on the OTCQX.
The OTCQB, on the other hand, tends to be an arena reserved for venture capital and startups. Mostly new companies tend to be here, which means that the reporting can be pretty rough around the edges due to the sheer novelty of the company.
The most speculative arena of the OTC is the "Pink" section. This doesn't have an "anything goes," motto, but it's pretty close. Reporting here is extremely variable, which makes it very risky for many people involved in the stock market.
But why is it called "the Pink?"
Perhaps one of the most perplexing aspects of the OTC Pink's name is that it has the word "pink" in it. This actually is a leftover from the early days of the OTC.
Highly speculative stocks were the ones that were issued out on pink sheets of paper. As a result, stocks traded in the Pink arena were very easily recognizable when compared to the OTCBQ or OTCBX.
You probably may have heard some bad things about the OTC.
Many people assume that the OTC Pink isn't really a good place to start trading, primarily due to the high risk that comes with variable reporting. It is true that many "pink sheets" stocks are risky, or downright bad investments.
However, there are plenty of great companies that could easily trade for higher amounts in the future. Being on any stock exchange under the OTC umbrella comes with risk. How you choose to navigate the risk will determine your reward.
The Pink Marketplace has three different levels of reporting that go on inside of it.
Since reporting methods and requirements may vary on the pink sheets, it's really hard to generalize. However, most professional traders will say that there are three main levels of reporting:
- Current Information. These companies are stocks that operate under International Reporting Standards or Alternative Reporting Standards. The reports are fairly thorough, and are usually published on the OTC Disclosure & News Service.
- Limited Information. Some companies will publish a little less than what's standard on the OTC Pink, or seem very unwilling to openly discuss what's going.
- No Information. In these cases, the company doesn't disclose any information whatsoever.
The OTC Pink marketplace has one of the widest variety of companies on any exchange.
So many companies of all different types can be found on the OTC, and the Pink category houses some of the most uniquely different companies of all.
They run the gamut from penny stocks to shell companies to distressed companies and more. People (obviously) don't want to invest in some of these categories, which is why they ended up on the Pink rather than others.
It's risky, but a lot of gems can be found here. The best way to think about the OTC's Pink marketplace is that it's the "Yield" sign on the highway of investing.
It's also worth pointing out that the Pink marketplace is one of the only marketplaces to have companies flat-out refuse to disclose information.
Here's the problem that most people have with investing in the OTC Pink: It's sketchy. Almost every other marketplace and stock exchange will enforce a very bare minimum of disclosure, but the Pink marketplace will not.
Imagine being told to put down money in a company that refuses to tell you anything about it, and you'll soon understand why many people think even considering Pink companies is not worth the risk.
Another striking difference is that the stocks being traded aren't always registered with the SEC.
The SEC is the biggest champion of investors' rights and protection. It's the organization that changes after companies fraudulently report statistics and ensures that all investors get an equal chance to make money.
On the OTC Pink, stocks are not required to be registered with the SEC. This can also lead to less oversight and less protection from companies that want to bilk investors of cash.
While it is very high risk, it's not a total free-for-all.
Though this is a very high-risk arena, the truth is that it's not totally unsafe. At the very least, stock distributors that trade on the OTC have to be approved by FINRA to do so. Broker-dealers also have to be registered with the SEC as a protective means.
While you do still have to worry about the stocks, there's some comfort in knowing you won't have to worry about the broker.
Generally speaking, this is not a place for beginners.
If you haven't guessed, the OTC Pink is a stock market that is really, truly risky. There are a lot of companies here that are on the verge of failure, as well as some that are deceptively dangerous. This is not, by any means, a good place for a beginner to go.
Only people who are very seasoned in their investing should attempt to make money on the Pink marketplace. Even stock market gurus preparing for a recession won't touch this place, so don't feel left out if you aren't ready for it.