The share market is a marketplace where shares and other securities are traded. It is called the secondary market wherein you can buy shares from other investors, not from the company directly.
While listed companies can sell their shares on the stock exchange, what about unlisted companies? Are their shares available for trade?
Yes, they are, albeit in a different marketplace called the Over the Counter (OTC) market. Let’s understand it in details in this blog.
Over the counter (OTC) stocks are stocks of companies that are not listed on the recognised stock exchanges of India. It may be due to various reasons such as non-compliance with listing norms or ineligibility. However, such companies may be operating in interesting spheres such as a popular technology or have a product that has scope for growth that investors are keen to invest in. OTC markets provide this opportunity for investors to pick up shares of companies that are not formally listed on the stock exchanges. Note that they have their own pricing mechanisms, and maybe low priced.
Since OTC stocks are not listed on the stock market, i.e., the NSE and the BSE, they have a separate stock exchange dedicated to them. Such stocks are traded on the OTC Exchange of India, which is a stock exchange designed solely for over-the-counter stocks. So, if you want to trade in over the counter stocks, you need to trade on the OTC exchange.
Like with stock exchanges, trading on the OTC exchange is not directly possible. You need to buy or sell OTC stocks through registered brokers who deal in such stocks. Here are the options that you can choose from –
Full-service brokers are stockbrokers who facilitate investment in different financial instruments. Furthermore, they offer investment advice, recommendations and also help in managing your portfolio. Full-service brokers charge a fee for their service and might also levy brokerage on every transaction done through them.
Having a range of products at their disposal, most full-service brokers are able to offer over-the-counter stocks too to their customers. You would have to open a demat account and a trading account with such brokers to trade in OTC stocks.
Discount brokers are those that offer limited services and allow you to trade in stocks and other instruments for lesser charges than a full-service broker. Note that over-the-counter stocks are not available with all discount brokers. However, some brokers are authorized to allow their customers to trade in such stocks. So, if you have a demat account with a discount broker, find out if the broker allows trading in OTC stocks.
While OTC stocks can prove worthwhile, here are some aspects that you need to keep in mind before trading in them –
Over-the-counter stocks are quite cheap since they have low share prices, allowing you to buy them in bulk with a small investment amount.
Unlisted companies are not required to publish their financial statements to show how the company is doing. As such, investors are in the blind with regards to the company’s financial position. If the company is cooking its books to inflate its profits, you might be stuck in a bad deal if you invest in its stock.
If an unlisted company is working on a project that is expected to earn good profits, there is a possibility that the value of its unlisted share would see a considerable spike in the future. OTC stocks, thus, have the potential to deliver multibagger returns.
There is no scope of price discovery in the case of OTC stocks. Since they are not traded on the stock exchange, their price depends on market makers. Such market makers can indulge in price manipulation, as can large investors in penny stocks. They are also not subject to strict regulations. Not many investors are aware about OTC stocks. Those who do might also avoid investing in them given their risk profile.
You might not find a ready buyer or seller of the stock when you want to trade. This limits the liquidity of OTC stocks.
Over the counter stocks can be bought through authorized brokers from the OTC Exchange of India. They are often priced low and carry the potential of attractive returns should the company perform well, however, the risks are equally high. If you want to invest in OTC stocks, contact your broker and check if they provide OTC trading facility since not all brokers have access. Do your research into the company that you want to invest in and then invest for potential returns.