Even if your company isn't big enough to list shares on the New York Stock Exchange or NASDAQ, you can still use over-the-counter stocks to sell shares. This way, you can raise your capital and continue to expand your business.
Let's dig into everything over-the-counter stocks entail and how they can benefit your business.
What Are Over-the-Counter Stocks?
Over-the-counter (OTC) stocks are traded directly through market makers or broker-dealers. They are often considered unlisted stocks since they aren't listed on national securities exchanges.
Since many OTC stocks sell for less than $5 per share, many investors refer to them as penny stocks.
How OTC Stocks Are Used
OTC stocks are beneficial to small businesses and investors. If your company doesn't meet the financial requirements of the New York Stock Exchange or NASDAQ, you can sell your shares on an OTC exchange.
Even if your company has the right finances in place, many OTC exchanges are less of a hassle to qualify for. For instance, if you don't have the manpower to file extensive financial reports, you can use the OTC market.
Listing your company as OTC stocks are also much more affordable. For instance, it costs between $50,000 to $75,000 to have a listing on the NASDAQ. Most small companies can't afford this, so it's better for them to gain capital on the OTC exchange.
Investors like using the OTC exchange because many companies there have a lot of potential. If they invest in an emerging start-up company at the right time, they can hit it big without investing much money at all.
Trading on the OTC Markets
The OTC markets consist of three tiers that account for 10,000 U.S. and global OTC securities. Let's go over what each one entails:
- The OTCQX® Best Market: This is the highest tier since companies must meet the most requirements, such as compliance with U.S. securities laws, financial standards, accounting and reporting standards, and third party sponsor introduction. Around 400 companies fit in this tier and have a market cap of over $1 trillion.
- The OTCQB® Venture Market: Although this second tier of the OTC market is less strict than the top, companies still have to meet a set of requirements. For instance, you may need to report to a U.S. regulator or be listed on a qualified international stock exchange. You must also complete an annual management certification process.
- The Pink® Open Market: Compared to the other tiers, the third tier of the OTC market is like the wild west. Companies don't need to meet minimum financial standards. Investors may be wary of trading in this market since many companies are reluctant to provide much information at all. This tier is divided into three categories: Current Information, Limited Information, and No Information.
When your company is ready for its next financial step, you may want to consider selling your shares on one of the OTC markets. You might increase your capital gain without having to meet strict requirements. Happy investing!