What are OTC Stocks? What are penny stocks? These are great questions and before you even think about investing one of your hard-earned dimes you should spend some quality time educating yourself about these special kinds of stocks.

Common Terms in the Penny Stock Market

Penny Stock, the term itself can be a source of confusion for it has no single universally accepted definition.

• According to the Securities Division a stock can be considered to be a “penny stock” if it’s trading price is equal to or less than $5.00 per share and it trades in either the “pink sheets” or on NASDAQ. Many people consider only the shares that trade below $2 to be penny stocks.
• Additionally, to be considered to be a true penny stock, the company should have less than $4 million in net tangible assets. (i.e. according to the securities division)
• In general, penny stock would be a very small company whose shares are highly speculative and illiquid.

The “OTC” market

• Typically, OTC or ‘Over the counter’ means a security trading in some context not on a formal exchange like NYSE, AMEX etc. Penny stocks do not trade on a stock exchange. Instead they trade in an over-the-counter market.
• In other words, this term is applied to the stocks that trade through a dealer network and not via a central exchange. This is usually because the company in question is too small to meet the requirements of an exchange listing.
• This “unlisted stock” is traded and negotiated directly with one another by the broker-dealers.

OTCBB (Over The Counter Bulletin Board)

The OTC bulletin board refers to a regulated quotation service showing real time quotes, volume information and last sale prices in the OTC stock.

Principal/agency

• The broker-dealer could be your agent when he directly arranges a transaction between a third party and you. In return for his service you pay him a commission.
• However in another instance, the broker-dealer acts as a principal when he makes a transaction with you on his own behalf. In all such cases he is not to be paid any commission, instead he makes profit on the transaction like any other investor. When such is the case, it should be explicitly mentioned on the trade confirmation.
• A big number of penny stock transactions are principal transaction. An investor ought to be careful of the potential conflicts that might arise out of such transactions.

Bid

• To buy a security, the potential buyer needs to put forth an offer stipulating both the price and the quantity to be bought. Such an offer is termed as bid. In other words, bid is the price that a potential buyer is ready to pay for a security.

Ask

• The ‘ask’ is that price, which a seller is ready to accept in exchange for a security, it is also called as the ‘offer price’. In other words this is the price at which you want to sell your shares. Apart from the price, the ‘ask’ quote also shows the quantity of stock on offer. The ‘ask’ is always more than the bid.