Understanding the OTC Market is an important part of understanding how to trade penny stocks. Most penny stocks are not traded on a stock exchange like NASDAQ or the NYSE, but rather on the Over-the-Counter market (or OTC securities market).
NASDAQ and Penny Stocks
NASDAQ (National Association of Securities Dealers Automated Quotation) operates a small portion of the OTC Market with the NASDAQ National Market (NNM), but this portion of the OTC Market does not include penny stocks. However, there are securities traded on NASDAQ which fulfill most definitions of being a penny stock. The number of these securities available through NASDAQ varies not just naturally but because the NASDAQ listing standards change fairly often. Depending on the current standards, some penny stocks may or may not qualify.
The good news is that if you find a penny stock on NASDAQ, you know it has met some kind of minimum standards and that it has filed with the SEC (Securities and Exchange Commission). A penny stock found on NASDAQ is also easier to follow as most securities on NASDAQ can be found on public quote lists (like in Newspapers). You’ll find that one major hurdle in trading OTC penny stocks is that you often need to go through penny stock brokers who know the market and can find the real price or value of a set of penny stocks. Unfortunately, some of these market maker brokers may have motives other than simply helping you. Finding a legitimate penny stock on NASDAQ helps you steer clear of this difficulty.
Pink Sheets OTC and Penny Stock Trading
Pink OTC Markets, formerly known as National Quotation Bureau (NQB) and informally referred to as “Pink Sheets”, operates the most active component of the OTC market. If you start serious and extended penny stock trading, you will at some point deal with Pink Sheets.
Pink sheets got their name in a literal fashion; before the electronic version appeared, stock traded through the NQB were literally on long pink paper. This distinguished them from bonds traded through NQB which were on yellow sheets of paper.
It is important for you to understand that the Pink Sheets OTC is not a stock exchange and is not considered one by the SEC. Rather, pink sheets facilitate the trading of securities between market makers and independent brokers. Perhaps most importantly, penny stocks found on Pink Sheets do not fulfill a minimum standard and do not need to be filed with the SEC. When you read that, a big red sign that says “RISK” should be blinking in your head.
The electronic quotation system operated by Pink OTC Markets (which changed names from the National Quotation Bureau to Pink Sheets LLC and then to Pink OTC Markets in the last decade) is called the Pink Quote. The Pink Quote system not only facilitates exchange within the Pink Sheets, but it also assists in executing negotiations with OTC market quotation services such as the OTCBB (see below).
The OTCQX is technically a part of the Pink OTC Markets. It is considered to be a premium market tier. The purpose of the OTCQX is to increase visibility of companies traded as OTC market securities. With OTCQX companies, you still do not have the same full disclosure and assurance of an SEC filing, but unlike most standard Pink sheet stocks, they do need to fulfill a minium standard with the Pink OTC Markets. This includes providing audited financials and a specific disclosures to the Pink OTC Markets, which then are often listed on the Pink Sheets News Service.
Within OTCQX, you wil find both the PrimeQX and the PremierQX. Basically, any penny stock which fulfills the Pink OTC Market requirements for the OTCQX is listed as a PrimeQX. Larger, more established companies fulfilling these standards can list their securities as PremierQX.
Penny stocks not meeting the requirements for the OTCQX are listed as No Information, Limited Information or Current Information stocks. I will soon elaborate on these in an article dedicated to just Pink Sheets.
Over-the-Counter Bulletin Board (OTCBB)
The OTCBB provides real-time quotes and volume information for OTC market stocks which are not on a major exchange (such as NASDAQ or NYSE). You can think of the OTCBB as an in-between operator between the major exchanges and the Pink Sheets.
Unlike the Pink Sheets, to be traded on the OTCBB an OTC market security must come from a fully reporting company which is completely current with all SEC filings. However, these are still often stocks with no corporate governance and which may not fulfill the minimum requirements necessary to be listed on a major exchange. In fact, often times stocks traded on the OTCBB are former NASDAQ, AMEX or NYSE stocks which were delisted for falling below minium market capitalization or share price standards.
OTC Market securities listed on the OTCBB are often listed in the Pink Sheets as well.
If possible, trading penny stocks listed as PremierQX on the Pink Sheets and with current data on the OTCBB will help you steer clear of a good chunk of the manipulation and penny stock fraud that occurs with penny stock trading.
Having said that, you will still find plenty of fraud and manipulation with these securities, so always keep your skepticism high and your caution sharp when trading within the OTC Stock Market.