How to Buy OTC (Over the Counter) Stocks

OTC stocks are among the most lucrative stocks that you can buy. When you pick a stock like this you are looking to 10x or even 100x your money. As a company gets bigger, growth almost always starts to slow and along with that the total amount of money you can make. With an OTC stocks they are at the very beginning of the companies life and as a result they can have unlimited growth potential.

A Word of Warning

OTC stocks are traded on the Over-theCounter market. Typically this market requires less transparency then the NYSE, NASDAQ and AMEX exchanges. There are also lower volumes of stock traded on this exchange and typically there is less liquidity, which means that if you have to sell your stock in a hurry, it may result in you selling it for a price lower than what was expected.

Many OTC companies fail or do not increase their stock price. When a company is at the start of their growth cycle, they are more likely to go out of business, and sometimes you will run into a company that is not honest in their reporting. You should only invest money in these stocks that you are willing to lose. If this sounds too risky for you, then I would suggest moving to other growth stocks that grow slower, but are more stable and are less likely to go bankrupt.

How to Pick a Winning OTC Stock

Strong Leadership

Leadership is one of the most important elements of a successful OTC stock. A talented leadership team, with experience, oftentimes can overcome obstacles and make the company successful. Bad leadership will spend money poorly and even with a good product, they will run the company into the ground. Look up the leadership team of the company on Linkedin and google their names. See if they have a track record of success or if they are associated with failures. See how the CEO’s former companies turned out.

A Product that Makes Money Quickly

This is important because you want the company to turn profitable quickly, and you want their profits to drive growth. If the company has money on hand, they are much less likely to do a stock offering. A stock offering is where the company issues extra shares to raise money. In many cases this kills the price of the stock for existing shareholders through dilution. With a profitable product the company will have money flowing in early and is less likely to go out of business.

An Excellent Product

The product that the company is selling should be unique and offer an excellent value proposition that is not currently being offered. It’s not a bad idea to pick a company in your field, because it can be easier to understand what is a good product when you are familiar with it.

Low Competition

You want the company to be in an area where there is a low competition. For example, you don’t want to be investing in a company that is trying to make a web search engine, when they will be competing with billion-dollar companies like Google and Microsoft. Even if the company has a great search engine, it will not be long before the competition copies their features and drives them out of business.

Institutional Investment

Are mutual funds and hedge funds already invested in the stock? This is a great sign, as those funds have the resources to do advanced research on the stocks, and it makes it a lot more likely that you are buying into a winner.

Insider Selling

Is the CEO selling a ton of shares? That’s typically a bad sign. This stock is your vehicle to wealth, but it should also be the executive’s vehicle to wealth as well. If they are selling shares early, they likely know that something is wrong with the boat, and it could be sinking. Sales of a small portion of the insiders stock can sometimes be ok, but in most cases you don’t want to see it. You can get free alerts on insider trading with watchinsiders.com. You can get a free history of insider trades from Gurufocus.

A Warning on Biotech Stocks

Biotech stocks are very popular investments in the OTC space. They are typically creating something completely new and if they succeed then the end game is often to be bought up by a big pharma giant with great profits for all. Biotech is one of the hardest stocks to pick a winner in for the following reasons:

  • The owners of the biotech stock wants the price to go higher and will often overhype test results giving the investor a distorted idea of what is going on.
  • The road to a successful drug is a long one, and it can take years for FDA approval.
  • There are often nasty surprises when it comes to developing a new drug. Sometimes side effect appear and make the drug untenable. Other times the drug looks promising, right until the end when it is shown not to work at all. You may see a drug successfully pass phase II trials (which only means that it has been shown not to cause harm to people) only to fail phase III which shows that the drug is effective.
  • A biotech stock is not making money. They are burning money and if they can’t get the drug out in time they will have to issue new shares to keep the company running. Issuing new shares will often times dilute the value of your shares and reduce the long term outlook on the profits you thought you were going to make.

I would advise that you stay away from this type of OTC stock, until you become more experienced as it is very easy to get tricked and lose a lot of money.

The Best Brokerages to Buy an OTC Stock

Not every broker allows you to purchase OTC stocks. Robinhood, one of the largest brokers, currently does not allow you to buy from this exchange. Here is a list of 5 brokers that you can use to purchase OTC stocks:

Fidelity – If you have a 401k or Roth IRA with them, this can be a good platform to use, so you can see all your investments in one place. There is no commission on OTC trades

TD Ameritrade – This is one of the better platforms to use, and they have great trading tools, but they charge $6.95 per OTC trade.

Charles Schwab – Like Fidelity, if you have a 401k or Roth IRA with them, this can be a good platform to see everything in one place. There is no commission on OTC trades

Interactive Brokers – If you want to be an active trader or even a day trader, in addition to trading OTC this can be a good platform. They charge .0035 cents per share traded.

Tradestation – If you want to be an active trader or trade Cryptocurrency this can be a good broker. There is no commission up to 10,000 shares.

Where to Find Promising OTC Stocks to Invest In

Social Media Sites

Social media sites can be a great place to find promising penny stocks. Here are a few that you could check out:

  • Reddit has many subreddits devoted to penny stocks. Two of the popular ones are BioTechPlays and PennyStocks.
  • Stocktwits has people who you can follow who will point out promising penny stocks.
  • YouTube also has influencers who will trade penny stocks as well and do informational videos on them.

The key here is to understand that 95% of the stock picks that are provided by these sites are actually bad. The key to filter out the bad picks is to go back through the person’s post history and see how their past stock picks did over the long term. Find someone with a winning record and focus on their stock picks. If the person does not have a history then they are likely trying to temporarily manipulate the stock price for their own gain, and you should ignore them.

Once you have found some stocks it’s not over, you still need to do your own due diligence and look at each stock through the guidance provided at the start of this article.

Investor Conferences

Investor conferences can be another great way to find stock candidates. New companies looking for financing will come to conferences and give their pitch about why they are worth investing in. The Emerging Growth Conference, LD Micro Invitational and Planet Microcap Showcase are examples of these type of conferences.

Investing Websites

There are also a ton of investing websites like allpennystocks.com and investorplace.com that you can use to find OTC stocks. Be sure to look at the historical stock picks for these sites to make sure they are providing value.

News

You can also find OTC stocks by scanning news sites. Local news sites can be especially good, because you can find places that you can actually visit and get a better picture if they are the real deal.