How to Buy Over-The-Counter Stocks in the Share Market
- 07 Jul 2024
6 mins read- By: BlinkX Research Team
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In an over-the-counter market, the shares and securities are traded outside traditional stock exchanges like NSE or BSE. In these markets, brokers and dealers help customers sell and buy a range of financial instruments, such as bonds, currencies, equities, commodities, securities, and structured products. The OTC market can bring more liquidity, encourage participation from all classes of players, reduce costs, and promote decentralised trading. In this blog, we will understand everything related to over the counter stocks, their advantages, risks, and how to buy over the counter stocks.
What are Over-The-Counter Stocks?
The stocks that are not listed on official stock exchanges because of their inability to meet the strict listing standards set by these exchanges are called over-the-counter stocks. For example, under the BSE that is Bombay Stock Exchange only those small-cap companies can get registered who have a minimum market capitalisation of Rs. 5 crores and a minimum post-issue paid capital of Rs 3 crores. Companies that fall short of this standard can still issue the shares, but these shares will not be eligible for trading on BSE. Similar rules and regulations are applied to NSE. These companies' stocks known as OTC stocks or penny stocks are available in the market through full-service brokers and are not traded on major exchanges.
Table of Contents
- What are Over-The-Counter Stocks?
- What is the Difference Between OTC and a Stock Exchange?
- Advantages and Disadvantages of OTC Stocks
- How to Buy Over-The-Counter Stocks in India?
What is the Difference Between OTC and a Stock Exchange?
These are the differences between OTC and Stock Exchange:
Features | OTC | Stock Exchange |
| Meaning | OTC is a market where securities are traded directly between buyers and sellers without using a stock exchange. | The Stock Exchange is a centralised marketplace where sellers and buyers can trade securities, like stocks and derivatives, following the pre-established guidelines. |
| Control | In the OTC market, there are lower reporting requirements and regulations. | In the stock exchange, there are strong reporting requirements and regulations. |
| Transparency | There needs to be higher transparency and more public information available. | There is high transparency and high public disclosures. |
| Liquidity | Low liquidity | High liquidity due to large trade volumes. |
| Cost | The listing fees are low but the trading cost is high. | The listing fees are high but the trending cost is a little lower. |
| Speed of Execution | The speed here is fast because the transactions can be completed directly between parties. | The speed here could be slower due to the need for price matching and the potential for network delays. |
| Examples of Stocks | Small-cap stocks, foreign stocks, bonds, and derivatives | Large-cap stocks, ETFs, and mutual funds |
| Risk | High risk is involved because of less information and regulation. | The risk is lower here because of strict regulatory supervision. |
Advantages and Disadvantages of OTC Stocks
Here are the advantages and disadvantages associated with OTC Stocks:
Advantages | Disadvantages |
| Good opportunity to invest in small start-up companies. | There is an increased risk associated with funding unknown companies. |
| By investing in OTC stocks you get the chance to diversify your portfolio. | It can include risks and more speculative investments. |
| As it is less stringent, small companies can easily enter the market. | Less stringentness can also lead to more fraud and misinformation. |
| The liquidity is sometimes high for certain niche markets. | There needs to be more transparency and public information available about these stocks. |
| The listing fees for companies are lower leading to a wider variety of stocks. | Low listing costs can attract less reliable companies. |
How to Buy Over-The-Counter Stocks in India?
As we know OTC stocks are not traded on major stock exchanges, so unlike ordinary stocks they cannot be purchased using a standard online Demat account. The kinds of brokers and their functions are mentioned below:
Full-Service Brokers
Full-service brokers offer a wide range of services including buying and selling stocks, they provide portfolio management and trading advice. As they have physical offices in multiple areas they offer thorough services and access to OTC stocks.
Discount Brokers
To facilitate trading, discount brokers usually use Demat accounts and internet platforms. As compared to full-service brokers, discount brokers often charge low fees and offer limited services. Mostly all the online brokers belong to this category.
To purchase the OTC stocks you will need to employ a full-service broker because they have a physical presence and provide a wider range of services.
Conclusion
To sum up, investing in over the counter stocks can be a great opportunity for investors wishing to diversify their portfolios and to gain exposure to emerging new companies. As these equities are traded off traditional stock exchanges they offer high returns but also carry high risks because of low liquidity, fewer regulations, and high volatility. Investors can make informed decisions by gaining knowledge about how this market works, what makes it different from traditional markets, and how to buy over the counter stocks. Additionally, by downloading a reliable share market app you can stay updated on your investments and make informed decisions on the go.
