If you plan on trading penny stocks, it would be a good idea to have a good
understanding of how the middle tier of the over-the-counter (OTC) market works
- the OTCQB market. After all, the OTC market differs from the big board stock
exchanges where larger cap stocks are traded as it consists of different tiers
where many penny stocks trade.
What is the Over-the-Counter Market?
The over-the-counter or OTC market is a decentralized market where securities
not listed on a major exchange are traded directly and electronically by market
participants. In other words, there is no formal central exchange or meeting
place for the OTC market.
More specifically, trading on the OTC markets will occur via a network of
middlemen known as dealers. Instead of providing an order matchmaking service as
with the NYSE, these dealers carry inventories of securities in order
to facilitate any buy and sell orders.
What is the OTC Markets Group?
The OTC Markets Group is a private company that acts as the main inter-dealer
electronic quotation and trading system for the OTC market. It was established
in 1913 as the The National Quotation Bureau (NQB) and had previously reported
stock and bond quotations on pink and yellow paper – hence the terms “Pink
Sheets” and “Yellow Sheets.”
Today, the OTC Markets Group organizes the OTC market into a system of
categories based upon the level of financial and corporate disclosure that
companies trading over-the-counter provide.
What is the OTCQB Market?
market is considered to be the middle tier of the OTC market for companies
and penny stocks that do not qualify for the OTCQX market – the top tier of the
OTC market. The OTCQB was created in 2010 and is now home to nearly 4,000 small
and emerging companies – including many penny stocks.
Companies and penny stocks listed on this tier report to the Securities and Exchange Commission (SEC) or with
an appropriate banking regulator. However, there are no financial or qualitative
standards for a company or penny stock listed on this tier. Nevertheless, stocks
that trade on the OTCQB market are said to be committed to both disclosure and
transparency. Moreover, they are also considered to be less speculative in
nature than stocks trading on the OTC Pink – the bottom tier of the OTC market.
The Bottom Line About the OTCQB Market
At the end of the day, penny stock investors need to remember that just
because a stock is trading on the OTCQB Market, it does not mean that the stock
is of higher quality than a penny stock that is trading on a different OTC tier.
After all, the categories are more or less based upon the timeliness and level
of disclosure – not whether a stock is distressed or speculative in nature. In
other words and even if the penny stock you want to invest in trades on the
OTCQB, always do your due diligence to ensure that you are making a sound