Today, investors have a wide range of choices when it comes to acquiring and trading marketable securities, including shares or stocks, index funds, futures, and mutual funds. Most of these securities are typically traded on formal exchanges, such as the London Stock Exchange and the Financial Times Stock Exchange.
However, traders can also invest in the alternative OTC market for securities that are not featured on major exchanges for an increased income stream. Unlike the stock market and any other securities market, the Over the Counter (OTC) market allows traders to have an open trade.
This means that traders can buy or sell securities among themselves freely, without external interference. So, what opportunities does the OTC market offer to beginners and experienced investors? This article highlights investment ideas for the OTC market that you might not want to miss.
Understanding Over the Counter Markets
An OTC market is a securities market where investors trade directly among two participants through a decentralised market without regulations from an exchange regulator. Typically, OTC markets comprise of significantly small securities, most of which cannot meet market capitalisation requirements. Instruments traded on OTC markets include bonds, debt securities, derivatives, and equities.
What are the Risks Associated with OTC Markets?
Investing money and other instruments in the OTC markets come with plenty of risks, including the following;
In addition to being unpredictable, OTC securities are very volatile. They are easily manipulated, which is why investment research is recommended before trading.
- Lack of Transparency
Prices for the OTC markets are not disclosed to the public until the trade is closed. This can expose you to very adverse market conditions, resulting in losses. Having the right investment ideas will see you leverage income from OTC trading.
- Financial Risk
OTC markets consist of new companies that have no known track record. The microcap stocks, such as investment trust, can be very risky, with any trade size affecting the market’s share prices. It is essential to have the right investment ideas to minimise or mitigate this risk.
- Taxes on Earnings
Typically, you are required to pay capital gains tax for income generated by stocks over the period you held it. Holding the stock for over a year means that your capital gains tax will be calculated using the long term rate. However, when trading OTC stocks for quick earnings, you might not hold them long enough. This means that your income tax will be extremely high, resulting in losses.
Investment Ideas for OTC Markets
The good news is that even with the high risks associated with OTC markets, fund managers and investors are still investing in these markets for higher yields. Here are investment ideas for the OTC market that you might want to know.
- Emerging Markets
According to recent statistics, the best OTC investments will comprise of instruments from emerging economies in the future. While these new markets account for smaller OTC shares globally, their exponential growth is evident each year. This is an example of good investments that you should watch out for.
- OTC Derivatives
Derivatives are securities whose value is linked to an underlying asset or assets. The derivatives market largely constitutes of OTC derivatives. According to research, OTC derivatives have been on the rise in recent years compared to those trading in other exchanges.
The turnover of the interest rate for the OTC derivatives has also been on the rise, with trade in these markets growing by double. If you are looking for great investment ideas for OTC markets, then trading derivatives is an ideal choice.
- OTC Pink Market/Pink Sheets
The Pink market is considered to be the lowest tier of the OTC market’s securities. It is known for not having regulations, as well as no minimum financial standards. Although this is a risky tier of the Over The Counter markets, the Pink market comprises of conditions that make it a suitable untapped opportunity for your investment.
In fact, sometimes, the Pink market is the only way to investing in foreign securities, shell companies, and penny shares. There are plenty of European companies that have shifted from trading in major exchanges to Over the Counter markets. However, you might want to consult a financial adviser before investing in Pink Sheets.
What are the Requirements to Trade in OTC Markets?
The process of trading OTC securities is simple and straightforward. Investors will need savings accounts with a brokerage firm to trade OTC stocks. Investors can then define their investment order according to what they would want the broker-dealer to handle. Upon receiving your order, the broker-dealer will fund invest your order following a defined due process.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.