We discussed the NYSE and NASDAQ in Part 1: Sort Through The Stock Markets of USA and Canada of the White Top View Series, Stock Markets. Those are the market leaders among American stock exchanges. They cover a full spectrum of medium to large companies. Listings include companies from across America as well as many others around the world.
As always there is another way. There are several times the number of listings on other American stock markets. This Part 2 of the White Top View Series, Stock Markets, covers the American OTC market. At the end of this post, click the links to all parts of the White Top View Series, Stock Markets, for basic discussions covering the American and Canadian stock markets.
The American OTC Market
Investors can buy stocks in about 10,000 mostly small companies or startup ventures from broker-dealers in the OTC Markets Group. So named as the Over The Counter market. Headquartered in New York but using a distinct operating model that spans the US.
Investors aware of this market can protect themselves from it. While trying to objectively tell the story, in my view, from the point of view of an investor, there is not much positive to say about the OTC network or their unique distribution system. They distribute or I think of it more like pushing, lots of low value or worthless paper. For most investors, any stocks listed on the OTC Market deserve nothing more than a frown and a quick NO!
OTC is a network of about 160 broker-dealers from across the US. They offer stocks in companies through three levels of marketplaces.
Three OTC Markets:
OTCQX: need a PAL sponsor
OTCQB: need registration
OTC Pink: only need a dream
Another wee historical giblet: the OTC market evolved from a 1913 paper era creation, The National Quotation Bureau. That company published and distributed price quotations for stocks on pink paper and bonds on yellow paper, the pink and yellow sheets. In 1999 they finally got plugged into the electronic age but the ‘pink sheet’ tag remains on the lowest market level offered.
Their top-tier PAL refers to the need for a Principal American Liaison. Only an investment bank or sponsoring listing lawyer qualify as a PAL. I think this falls under the, “if you pay them they will sponsor you” rule. Not much assurance here, certainly no practical liability for them and in my view, no “pal” of any real investor.
The remaining lower OTC levels do not even need a PAL! These markets just need a gullible friend or your pocketbook; someone, anyone with the ability to buy stock in these often questionable deals. Buy and they get your money; you get the stock and quite possibly the shaft.
Too often OTC stock deals produce high-priced wallpaper or fish wrap! Most of the stock is certainly not worth the price of the paper. Worse yet, in the digital age you do not even get the paper! Just stay away. That will save you headaches, frustration and your money!
No Financial Reports Needed
The big reason that I am so down on the OTC market is the willful blindness of a huge regulatory black hole. The listed companies are not required to produce any financial reports. Only insiders can possibly know and have access to the numbers. The unscrupulous can quickly make this regulatory black hole burn a hole through your finances.
Few Real OTC Opportunities
There are some legitimate growing companies with OTC listings. They file regular audited financial reports. Additionally, they responsibly communicate with their shareholders, the market and prospective investors. The problem is simple. There are very few of them.
Closely Held Listings
Other real companies with a few shareholders also use this market. Such companies are multi-generation family enterprises or a local group all known to one another that formed a company. From time to time when shareholders of such closely held companies wish to buy or sell shares in their company, the OTC market gets used. These are proper and honorable transactions.
Such companies are usually closely held but have enough shareholders to fall under securities law requirements. That means such companies must trade on public markets to transfer shares. Still, they are essentially private groups, held by a few shareholders and not looking for any other investors. These companies do trade shares by appointment or prior arrangement when their infrequent transactions take place. Years can pass between transactions. No outsiders needed or wanted.
Seeking Quality Listing
If you seek quality listings on the OTC Market, you will have little company. The rub; perhaps 4, 40 or even 400 real workable operating companies exist among the 10,000 or so total listings. So which ones? The outsider has a very hard time ever knowing for sure. It is simply too much work to acquire, sort through and qualify the information. Due diligence ranges from tough to impossible. There are many more better money-making opportunities elsewhere.
If the OTC stories were not so sad, a vast collection of entertaining episodes could be told about market dreams and schemes. There are so many. Most serve as testament to naiveté, trust and gullibility of humans. Librarians could file them as either black humor or lessons in life. Please seek your entertainment and education needs elsewhere!
We Can’t Forget The Grey Market! It can and does get worse!
As unbelievable as it may seem, there is an even lower level of life in the American securities market! The Grey Market occupies the bottom rung of the stock market quality ladder. Do not spend any time here! Please stay away!
Anyone that decides to give the poor to dreadful OTC market a pass, will never touch the completely toxic, “you will go blind if you look”, Grey Market, the darkest of all markets.
Next our series turns far more optimistic and upbeat as we discuss the Canadian markets.
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Links to the White Top View Series, Stock Markets