While investors might be familiar with the listed exchanges, such as Nasdaq and the New York Stock Exchange, those who are interested in investing in smaller companies and startups might consider over-the-counter stocks. The OTC market is the market for companies that cannot meet the listing requirements of one of the major exchanges. Although it’s not necessarily better to invest our New York securities attorneys can help you understand the pros and cons of each.
Pros and Cons of Trading Over-the-Counter
Investing can always be a risk. However, when trading an over-the-counter stock, these risks can be greater. OTC markets are decentralized and consist of broker-dealers who contact other brokers when a trader places an order. Specifically, these brokers search for buyers and sellers but they might not find one. This makes OTC markets less liquid than stocks on the major exchanges.
Some pros of OTC trading can include:
- OTC trading can be best for investors interested in startup companies
- Those who invest in penny stocks may take a bigger position in a company
- Large and small companies can list their stocks with less rigorous requirements and more cost-effective than a listed exchange
Critically, OTC markets can be hazardous for traders and these exchanges are tiered based on their level of risk. Some disadvantages that can come with trading over-the-counter concern the lack of regulation. This lack of regulation can lead to questionable practices and make manipulation easier. Orders can take much longer to fill — sometimes, they may not be filled.
Benefits of Trading on an Exchange
A listed stock exchange is a market where stock buyers connect with sellers. Unlike OTC trading, a stock exchange is a centralized location. However, since electronic exchanges occur on electronic platforms they do not require a physical location for trading to take place. One advantage of trading on an exchange, versus in the OTC market is that they are more heavily regulated by the Securities and Exchange Commission. This increases transparency and ensures investors have fair access to investment opportunities.
Any market participant can sell as high or buy as low as any other trader if they follow the exchange rules. Also, exchanges are much more liquid since all buy and sell orders are exposed. Certain exchanges also designate participants as dedicated market makers, requiring them to ask for quotes and maintain bids during the trading day.
An exchange can provide liquidity, transparency with information availability, flexibility to change an investment portfolio, much less risk, and maintenance of a fair price. These parts of exchange often make it a better option for many investors to trade than the risky OTC market.
Contact an Experienced New York Securities Attorney
If you’re considering trading in the OTC markets or one of the major exchanges, it’s essential to have the guidance of a knowledgeable securities attorney. Our New York securities attorneys can help ensure you satisfy the SEC requirements and comply with all necessary regulations. Brinen & Associates will assist companies and investors with a wide variety of securities matters. Call (212) 330-8151 or send us a message to learn more about how we can help.