The most common way to start stock trading is through a broker with stocks that are listed on a formal exchange, such as the Toronto Stock Exchange (TSX) or the TSX Venture Exchange. That being said, you can also purchase OTC stocks. What exactly are OTC stocks? Well, OTC stands for Over The Counter. These stocks don’t meet the regulations to be listed on a formal exchange and therefore are not listed.
How OTC Stocks are Different
The main difference between OTC stocks and regular stocks is that they aren’t listed on a formal market. For this reason, this means that the stocks are likely cheaper and less regulated.
Just because a company is listed as OTC, that isn’t necessarily a bad thing. OTC stocks are normally companies that are just starting off, or they are looking to save money. Other companies just don’t meet the volume requirements to be listed on a formal exchange.
It is also possible that the business on the OTC was delisted from a formal exchange. This could be because they went private, delisted certain classes of stock, or didn’t follow the regulations and were forced off the exchange. There are so many possible reasons.
Ultimately, OTC stocks aren’t that different from regular stocks. You just need to be careful because of the lack of regulations.
How to Purchase OTCs
Buying OTC stocks is similar to purchasing other types of stocks. The same general process applies. The one difference may be that some brokers don’t work with OTC stocks, so be sure you choose a broker that does if you want to trade them.
The first thing you are going to want to do is find a broker. Once you have done that, you need to put money into your brokerage account, at least enough to fund your trade. Before you make the trade, though, make sure that you do your research. Whether the trade is OTC or not, you always want to do your research first and make an informed decision.
Once you have done all of the research, then it’s the easy part: find your stock and purchase it. No matter which broker you choose to work with, the process will likely be similar if not the same.
Where to Purchase OTCs
As we mentioned before, not all brokers allow trading of OTC stocks. There are a few that you can, though. In Canada, you can trade OTC stocks through these different platforms.
Interactive Brokers
Interactive Brokers is an online brokerage that allows you to trade OTC stocks. The thing about online brokerages is that they often have low fees, and Interactive Brokers follows suit on that. There is no account fee, and their trading fees range from $1.00 to 0.5%, depending on the stock. Like most other brokerages, you can also use them for any other investments you would like, such as:
- ETFs
- Bonds
- Options
- Currencies
- Futures
- Stocks on formal markets
Questrade
Questrade is a flexible, self-directed online trading platform. They also allow OTC trades as well as formal market stocks. Questrade also offers no account fees with trade fees ranging from $4.95 – $9.95 per trade. The list of securities that you can invest in with Questrade is a little bit longer.
- ETFs
- Bonds
- Options
- Mutual Funds
- GICs
- International Equities
- Precious Metals
Qtrade Direct Investing
With Qtrade, you may have to pay some account fees. How it works is that there are some conditions in order to maintain the $0 fees. If those conditions aren’t met, then you may have to pay $25 per quarter. Their trading fees are relatively low, though at $6.95 to $8.75 per trade. Besides OTC stocks, on Qtrade, you can trade:
- Bonds
- Options
- Mutual Funds
- ETFs
- GICs
- Stocks on formal markets
OTC Stocks and the Top 5 Banks
We already know that you can purchase OTC stocks through some online brokers, but what about the top 5 banks? Can you purchase OTC stocks through the Royal Bank of Canada (RBC), Canadian Imperial Bank of Commerce (CIBC), Scotiabank, Toronto Dominion Bank (TD) or the Bank of Montreal (BMO)?
CIBC
CIBC Investor’s Edge doesn’t allow you to facilitate trades online. They only allow OTC market trades to be done with a live representative. There are also restrictions on how you can trade OTC stocks. With CIBC, they have to be done through a non-registered investment account.
RBC
While it is not as widely known as the options above, you actually can trade OTC stocks with RBC Direct Investing. You can purchase using a bank transfer with RBC, and on the plus side, they are also known to have low fees of only $9.95 per trade unless you make more than 150 trades. If this is the case, the fee is then only $6.95.
TD
When it comes to purchasing OTC stocks from TD, they are also very limited. There are very few to choose from.
Scotiabank
Scotiabank allows trades of OTC stocks along with trades done on formal markets. The process is the same for both. You can open an account online or contact an advisor directly.
BMO
With BMO, you can also trade OTC securities. The options are more limited, though, than the more commonly used markets above. The process for OTC stock trading works similarly to trades of other securities; you just may not be able to do them online, depending on the stock.
Trading OTCs with Wealthsimple
While Wealthsimple is a really popular platform for trading securities, you actually cannot trade OTC stocks using Wealthsimple. That being said, you can trade crypto on Wealthsimple, which is something you can’t do with Questrade.
The thing with Wealthsimple, though, is that they also have $0 fees, so if you did sign up, you wouldn’t have to pay anything. It also has plenty of other investing options. As we have mentioned, though, OTC stocks are riskier, so not all platforms will allow you to trade them. If you are looking to trade OTCs, do your research before you put any money into a brokerage account. You want to make sure that you are putting the money where you intend to invest it.
OTC Stocks and Penny Stocks
Penny stocks are stocks that sell for a low price, usually under $5. Penny stocks are usually held by new companies and companies that are not listed on a formal exchange. For this reason, the majority of trading penny stocks is done on an OTC market.
While penny stocks may seem like an ideal purchase, they actually aren’t commonly purchased by new investors. This is because penny stocks, as well as a lot of other stocks on the OTC market, have a higher market volatility than most other stocks that are listed on a major exchange.
There is quite a difference between penny stocks that are listed on a formal market and those listed in OTC markets, though. OTC market stocks can be invested in TFSAs and RRSPs, whereas those that are on formal markets are not.
Keep in mind that when you buy penny stocks, no matter where you purchase them from, it is much riskier than other stocks, so it still may not be recommended. Investing in TFSAs at all can be a little bit tricky since TFSAs are still technically monitored by the federal government, so you should avoid active trading in them in general.
Pink Sheet Stocks
If you have heard of OTC stocks before, then you have probably heard the term pink sheet stocks. The terms are pretty interchangeable. This is because, before OTC markets were called OTC markets, they were Pink Sheets LLC. Hence the name pink sheet stocks. It helps to note that all of their stocks and bonds are listed on the pink and yellow sheets. In 2011, it became known as the OTC market group.C markets were called OTC markets, they were Pink Sheets LLC. Hence the name pink sheet stocks. It helps to note that all of their stocks and bonds are listed on pink and yellow sheets. In 2011, it became known as OTC market group.
OTC Markets
When you purchase an OTC stock, it is going to be listed in one of the 3 possible OTC exchanges. These markets are owned by OTC Market Group. With OTCs, it is important to remember that Canada does not have an OTC market, but the US does. This means that these US markets, as well as the market they use to facilitate the trades ( OTC Link), are regulated by the SEC.
OTCQX
The OTCQX market is also known as the best market. This has a lot to do with the fact that this is the strictest market of the 3. With this market, penny stocks are unable to be listed on it. Many OTC stocks in this market are from companies from Canada, Europe, Brazil and Russia that are considered to be blue-chip companies. One well-known example of this is Heineken N.V. (HINKF).
Before November 2021, the OTCBB (Over The Counter Bulletin Board) used to be the main market for trading OTC securities. It was then that the OTCQX took over. The OTCBB no longer exists.
OCTQB
This market is known as the venture market and is the middle ground of the 3. There are no restrictions on penny stocks in this market; however, most of the stocks found here are from growing companies around the world.
OTC Pink
The third market is the open market. This is a market for stock that doesn’t qualify for the other two markets. Because of this, though, this is the riskiest market to invest in. It is the default market. Companies are not required to disclose any information to be listed here.
OTC Stock Lists
Even though OTC stocks are not as commonly talked about as those listed on the TSX or TSX Venture Exchange, there are actually over 12,000 different stocks listed here. While we do caution you to do your research before investing money in companies on the OTC, there are plenty of legitimate companies. Some of the largest companies started out by being listed on the OTC.
Other companies choose the OTC markets for other reasons, like avoiding the SEC or being delisted. Some massive companies still choose to trade on OTC markets even though they are large enough to trade through other markets.
Here are a few larger companies that trade on the OTC markets:
- Canadian Imperial Bank of Commerce CIBC (CCIXF)
- Samsung Electronics (SSNL.F)
- Volkswagen AG (VWAGY)
- Enbridge Inc (EBBNF)
This is just to name a few.
Canadian OTC Stocks
Even though Canada doesn’t have its own OTC market, there are plenty of Canadian companies that are listed on the US OTC markets: 965, actually. Keep in mind that some of these companies are also listed on major exchanges like the Toronto Stock Exchange or Venture Exchange. Another term for this is cross-listed. This means that they are listed on more than one exchange at a time.
Investing in OTC Stocks
Investing in OTC stocks is really a personal decision. There is some risk in it, but there can also be rewards. There are plenty of really successful companies that had Over The Counter stocks, such as Walmart. There are also some current successful companies there. Just because a company is listed on OTC markets doesn’t mean that you will lose money; it just means that they don’t qualify for a more formal market, or they are choosing not to list there. Some may even just be cross-listing.
The most important thing when it comes to investing in the OTC market, or really any type of investing, is to do your research. There are never any guarantees, but the more informed you are, the less likely you are to lose. Even though that said, you want to be sure you develop an investment strategy just to keep yourself on track. This applies if you are day trading or just casually investing.
Buying OTC Stocks in a TFSA
While OTCs are recognized by the Financial Industry Regulatory Authority, they aren’t by the federal government. Due to this, you can’t buy or sell stocks that are considered to be OTC in registered accounts. You can only hold eligible securities in a Tax-Free Savings Account.
No matter what the stock prices are, if you do hold Over-the-Counter (OTC) stocks in this account, there will be a penalty. This is why general investment advice does not recommend it. There will be a 50% tax on the fair market value and a 100% tax on any gains and income from the investment.
Other Things to Consider
Just like with many other investments, some brokerages will allow you free trades, so this is no different with OTC stocks. In fact, with many broker-dealers, you can buy stocks, margin accounts, pink open market sheets and more. You can find high-risk stocks, stocks of small companies and smaller companies, past performance, as well as earnings.
With certain platforms, you can even purchase on the NYSE, also known as NASDAQ. That said, you do have to follow the rules of the United States Securities and Exchange Commission. That said, they do have to meet certain standards to be listed here. You can add them to your portfolio, though, still.
Since investing is highly speculative, you can choose to invest based on company name, cash, liquidity, dollar value, services, commodities, assets, access and more. You can even purchase for two parties, and generally get limit order investments as well as access to other services. No matter whether you choose to invest in OTC stocks or not, there are investments for everyone.
