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Looking to spice up your portfolio with some exotic international flavors? Or are you just on the hunt for some bargain basement securities? Read below to learn about over-the-counter (OTC) stocks and how to buy these unusual offerings on the Robinhood app.
What are OTC stocks?
OTC stocks got their name because they do not trade on mainstream exchanges such as the NYSE or NASDAQ. They are sold “over the counter” and sometimes generalized as pink sheet stocks. However, OTC stocks are actually traded on three different exchange systems or tiers, the OTCQX Best Market, the OTCQB Venture Market and finally the Pink Sheets, the latter being the true Wild, Wild West of unregulated stocks.
OTC stocks are often incorrectly associated synonymously with penny stocks. While many OTC stocks are penny stocks (trading under $5 per share), not all OTC stocks are penny stocks, nor are all penny stocks OTC stocks. In fact many of the penny stocks you will find on the Robinhood Investing app are listed on the NASDAQ stock exchange.
Different Categories of OTC Stocks
OTC stocks available to US investors generally break into three types of categories:
- US penny stocks – When most people think of OTC stocks, they are thinking of ultra-low priced stocks that trade as penny stocks, many of which are well under $1.00 per share. A lot of companies from “emerging” industries such as blockchain, cannabis and biotech shares trade as low-priced OTC stocks. Unfortunately, most of these types of companies are NOT available on Robinhood.
- International stocks – Many large international companies list on their home market but choose to forego the regulatory scrutiny that comes with listing on a major US market and choose to list their shares on the Pink Sheets as an alternative. Many name brand international companies including Nestle and Softbank have chosen this route.
- Delisted Stocks – Some companies run afoul of a major exchange for various reasons and get delisted from the exchange that housed their shares. This is often but not always a sign of major financial trouble and will usually result in the stock joining the penny stock group listed above. One notable recent example of this is Luckin’ Coffee, which now trades OTC under ticker: LKNCY.
Risks of OTC stocks
Like with penny stocks, trading OTC stocks come with some unique risks. The main risk market experts point to is that because they are not associated with an exchange, OTC stocks are less regulated and may engage in accounting practices that are not standardized among large, mainstream US stocks.
Additional risks include a lack of liquidity. Most OTC shares are thinly traded, meaning that it might be difficult to sell shares at the listed price, resulting in slippage.
Another risk involves international investing. If you are buying an OTC stock of a foreign company, you have to factor in risks unique to that country’s market, corporate governance practices and currency. This is especially true of stocks in emerging markets such as China, Brazil, India and Russia.
Finally, if the OTC stock you are buying is considered a penny stock (trading at under $5 per share) then consider the additional myriad risks of these securities that we laid out in this article.
Notable OTC Stocks Available on Robinhood
Robinhood has made great progress in giving investors access to a wide variety of OTC stocks including some notable international brands. Below are some examples of notable OTC stocks you can purchase on Robinhood (please note: the below list is not to be construed as a recommendation; you should do your own due diligence on any investment before buying it).
- Nestle (NSRGY) – If you need proof that not all OTC stocks are penny stocks look only at the famous European consumer staple group, whose OTC shares currently trade at $112 at the time of writing.
- Tencent (TCEHY) – Robinhood also makes the Chinese internet giant’s OTC shares available to US investors.
- Softbank (SFTBY) – The Japanese software group has been in the news for its sizable investments in the likes of WeWork and Uber.
How to Find OTC Stocks on Robinhood
If you’re looking to buy name brand international companies such as the ones listed above, a good approach is to search on your Robinhood app through the collections feature. Robinhood groups together stocks by region so you can search for “Europe” or “Asia” to pull up a large list of these types of companies. Keep in mind however, that many international stocks listed in these groups will actually trade on US exchanges and not be listed as OTC stocks. A good tell on whether or not the stock you are looking at is an OTC stock is the ticker: most international OTC stocks will have a five letter ticker, such as the ones listed above, or in the example of Japanese video game maker Nintendo (NTDOY).
Unfortunately, if you’re more interested in finding American penny stocks traded on OTC exchanges or the pink sheets, you are most likely out of luck as Robinhood does not carry most OTC penny stocks. If you’re trying to learn and execute on the methods of penny stock traders such as Tim Sykes, you will want to get on a full-service brokerage platform such as TD Ameritrade or Interactive Brokers (IBKR) for a number of reasons that will make trading OTC penny stocks more feasible.
You can however find numerous “penny stocks” that trade on NASDAQ on Robinhood.
Alternatives to Buying OTC Stocks on Robinhood: Full Service Brokers
While there is nothing inherently wrong about buying OTC stocks, they do have unique risks that are not all present in the listed versions of their shares (the version of the stock that trades and is regulated on their home country’s market). If you are interested in going beyond dabbling in these companies, consider opening an account with a broker that offers direct local market access.
Interactive Brokers is one such example that offers investors access to most major local markets throughout Europe, Asia and the Americas. Holding shares on the local market may potentially offer investors some added protections that are not available to holders of the OTC shares.
Additionally, if you’re interested in trading OTC penny stocks that are touted by the likes of Tim Sykes, then Interactive Brokers or TD Ameritrade will have hundreds of these types of companies available for you to buy (and possibly short), as well as much more robust trading tools that you will need for such an enterprise.
For small purchases of international OTC stocks to diversify your portfolio, Robinhood is a fine choice.