The over-the-counter market, commonly known as the over-the-counter market, is where unlisted securities are traded on major stock exchanges.
The stocks and bonds that are traded in the offshore market are usually smaller companies that do not meet the requirements for listing on a major stock exchange.
How does the offshore market work?
In their report published by the American magazine "Forbes", authors Anna Louise Jackson and Benjamin Carey say that the offshore market means trading securities outside the major stock exchanges.
There are more than 12,000 securities traded on the offshore market, including stocks, exchange-traded funds, bonds, commodities, and derivatives.
And unlike traditional stock exchanges such as the New York Stock Exchange or Nasdaq, there is no physical location linked to the offshore trading market.
Instead, all trading takes place electronically and directly between two parties in a decentralized market.
Although the securities in the offshore market are not “listed” on the major stock exchanges, these companies can still sell their shares to the public over the counter.
For the average investor, buying shares in an over-the-counter market may not differ from buying listed securities, because shares are assigned a unique ticker symbol and are usually available for trading through major online brokers.
The offshore market involves the virtual exchange of certain securities, such as corporate bonds, and is a viable alternative for companies that do not meet or maintain requirements, such as the number of shareholders or monthly trading volumes, to list their shares on major stock exchanges.
Alternatively, some companies may choose to remain "unlisted" in the offshore market, possibly because they do not wish to pay a listing fee or be subject to stock exchange reporting requirements.
Differences between the offshore trading market and stock exchanges
There are some basic differences between the offshore trading market and official stock exchanges.
Besides the decentralized nature of the offshore trading market, the main difference lies in the amount of information companies make available to investors.
When stocks are listed on official exchanges, investors can access a wealth of information about them, including reports written by Wall Street analysts, company news and files, and real-time trading data.
In contrast, there is little information available about OTC stocks.
The lack of transparency and regulation means that the offshore trading market can be more risky for investors, and sometimes even prone to fraud.
Moreover, the quoted prices may not be readily available with less liquidity, which means that these stocks are subject to major price fluctuations.
For example, small stocks are traded in the over-the-counter market, and are known for being high risk and prone to fraud and major losses.
However, the offshore market remains home to many American Depository Receipts that allow investors to buy shares of foreign companies.
3 markets for foreign trade
The Overseas Markets Group, the largest electronic market for OTC securities, aggregates securities by level based on the quality and quantity of information reported by companies.
While these postings do not talk about the benefits of investing for a particular company, they do indicate how much information is available.
The following are the 3 most important foreign trading markets:
The best market (OTCQX):
It includes well-established and reputable companies that meet high financial standards and other stringent reporting requirements.
The venture market (OTCQB):
Dedicated to small businesses that are still growing and developing.
The eligibility requirements for this market are more lenient than the best markets, although companies may not be in bankruptcy.
The pink market:
Commonly referred to as the Pink Papers, it is one of the most dangerous OTC markets.
In other words, pink market-traded companies provide the least amount of information and fail to meet the reporting requirements set by the Securities and Exchange Commission.
This category is also known as the open market, which is home to most small stocks, shell companies and companies that are in some kind of financial distress.
As a result of the less stringent standards that must be included and the lack of quality control, these securities are subject to fraud and pose risks to investors.
Another market that is difficult for most investors to access is the gray market.
These securities are not traded by brokers and dealers due to lack of available financial information and regulatory compliance.
Is the offshore market safe?
The offshore trading market is generally considered highly risky, due to the more lenient reporting requirements and low levels of transparency associated with these securities.
And since many OTC stocks (including small stocks) have low prices, they are ready for speculation.
Eventually, some stocks rise in value in the offshore market and become listed on major stock exchanges, and the prospect of long-term investment gains can be attractive to potential investors.
At the same time, the value of the shares of other companies that have shares outside the stock exchange is declining.
As with any investment decision, it is important to fully consider the pros and cons of investing in unlisted securities.
Knowing the characteristics of the three offshore trading markets will help you determine a company's relative investment risk, although this information alone will not help you determine whether an investment opportunity is a good one.
That is why it is still important to conduct a thorough search and examination of the available information.
Foreign trading stock market risks
Since OTC shares have less liquidity than those listed on stock exchanges, in combination with lower trading volume and larger spreads between bid and ask price, they are subject to more volatility.
Penny stocks and other OTC securities are readily available for trading with many online brokers, and such trading may be subject to higher fees or some restrictions.
For example, some brokers may restrict OTC trading during the period coinciding with the opening and closing of the stock market or require investors to set limited rules in place of market rules.
Due to the high speculative background and high risk of investing in OTC securities, it is important that you only invest a small amount of money.
While these stocks can make quick and huge gains, they are also prone to fraud, such as the so-called "pump and dump" schemes in which people make a fuss about cash stocks to raise their price and attract more investors before they sell and drop in price .