Over the Counter Stocks: Risk vs Reward

Many over the counter stocks differ from stocks traded in traditional markets in several important ways. These are stocks of smaller, newer companies. The unique characteristics of these stocks can provide investment opportunities for smart investors. These investors must have the ability to recognize both the risks and the rewards. Success in this market requires that an investor be prudent and be willing to accept a reasonable amount of risk. The investor must be willing to research potential investment opportunities carefully.

What Is the Over the Counter Market?

There are several centralized exchanges where investors trade securities. The New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) are the two most well-known. Trading on the traditional major exchanges is done in person, face to face. By contrast, the over the counter market is a computerized network. Transactions occur electronically in the over the counter market. There is no person-to-person contact between traders. The major traditional exchanges have stringent listing requirements. A company must meet minimum financial standards in order to be listed in a major exchange. Many smaller companies cannot meet the requirements of the major exchanges. Therefore, you will find the stocks of these companies listed as over the counter stocks. Many of these companies are start-up companies. Some of them grow to a point where they eventually meet the requirements for listing on a major exchange. At that point, their stocks can continue to trade over the counter, or they can apply for listings on a major exchange.

Risks of Over the Counter Stocks

Many stocks listed as over the counter are not financially strong enough to meet the listing requirements of the major exchanges. The lack of financial strength can pose a potential risk for investors. It is not certain that some of these companies can withstand an economic downturn. Also, it is not uncommon to find newer companies in the over the counter market. Newer companies will be unproven, with short financial track records. Also, it may be too soon to judge whether these companies have a viable product or service. Therefore, they are deemed to be riskier investments.

Rewards of Over the Counter Stocks

Many stocks traded on the major exchange are stocks of mature companies. These companies typically will not experience the explosive growth they may have experienced initially. The best chance of investing in the next new, innovative product or service is in the over the counter market. Many of these companies operate under the radar, and Wall Street has not yet discovered them. Therefore, the stocks of these companies will be undervalued. Investors who are looking for the highest potential rates of return may find these returns in over the counter stocks. However, the high-potential stocks are not always easy to identify. Many companies that were thought to have the next great product or service have stopped doing business, which is one of the risks. Yet the fact remains that many investors have received high rates of return when they have chosen the right over counter stocks that experienced tremendous growth.

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