Understanding OTCBB Stocks: A Guide for Investors

OTCBB stocks are stocks that are not traded on the major stock exchanges. The term OTCBB stands for over the counter bulletin board and these stocks are traded through dealer networks, instead of exchanges. The companies which make up this market are much smaller than what you will find in the larger stock exchanges. Here are a few things to consider about trading OTCBB stocks and how they work.

OTCBB Stocks

There are no specific requirements for companies to meet in order to be classified as an OTCBB stock. With the large stock exchanges, companies have to meet certain financial requirements in order to be considered for listing. With over-the-counter stocks, this is not the case. 

These stocks are also sometimes referred to as penny stocks. These stocks are traditionally traded for very small sums of money which led to them being called penny stocks. 

Trading these stocks will be a little bit different than working with regular stocks on the stock exchanges. When you trade on the New York Stock Exchange, you can trade with other traders through a centralized exchange. With this type of stock, you will be trading through a network of dealers. The dealers will essentially communicate with other dealers in an electronic exchange in order to find a counter party to your trade. 

Low Volume

One of the big differences between trading on the stock exchange and trading over-the-counter is the amount of volume. With over-the-counter stocks, there is generally a very small amount of volume for many companies. There are not thousands of traders that are willing to trade a stock at any given moment with these companies. This has an impact on trading activities. When you need to buy or sell a particular stock in this market, there may be large price discrepancies between the price that you want to pay and the price that is available. It may also take longer to get one of your orders filled than it would with the traditional stock exchange.

This also leads the price of stocks to change rapidly. Even a small news announcement involving a company could cause the price of the stock to plummet, or rise, very quickly.

Scandals

When you are dealing in this market, you have to be very careful with your money. There have been many scandals in the penny stock market. The problem with this market is that the price of the stocks can be manipulated rather easily by large investors. For example, an unscrupulous investment company could decide to purchase a large amount of shares of a stock and then tell other investors to do the same. When the other investors buy the stock, it will drive the price of the stock up. Shortly after the increase, the investment company will sell their shares for a large profit. At the same time, other investors are left with stock that is essentially worthless. As with any type of stock investment, invest only once you complete a thorough research on the company and base your decision on your research, not on any tips from investment advisers.