There are a number of differences that can in be summed up in a word: risk. Each difference explains why trading in OTC Market stocks is a risky venture not to be pursued by anyone not prepared to lose all one’s money. Some of the notable differences are:

Listing Requirements

NASDAQ companies are subject to stringent listing requirements. OTC market stocks are not subject to the same substantive requirements. NASDAQ companies must meet minimum listing standards such as having minimum amounts of net assets and minimum numbers of shareholders. Conversely, the OTC do not have to meet any minimum standards. In addition, NASDAQ also performs background checks on the business and principals of their companies.

Ongoing Reporting Requirements

NASDAQ also requires that companies be in full compliance with SEC ongoing reporting requirements. NASDAQ companies are obliged to file annual financial reports (10-K Forms), quarterly reports (10-Q Forms) and other filings with the SEC. If any company doesn’t comply, that company can be delisted for being delinquent. A company must file reports with the SEC if it has 500 or more investors and $10 million or more in assets; or it lists its securities on the major exchanges. As such many OTC stocks are not required to file reports.

In part this has changed in that as of January 1999, new OTC companies must file their financial reports with the SEC and those existing OTC companies as of January 1999 must, starting July 1999, comply with the new requirements to be phased in over a 12 month period beginning in July 1999 and continuing through June 2000. After June 2000, all companies on the OTC Bulletin Board will have to comply.

OTC stocks are thinly traded

Since the market for these stocks are usually controlled by a single market maker, the stocks are subject to price manipulation. The brokers on the inside can create false volume by trading among themselves, artificially raising the price on little volume and in the classic “pump and dump” scams, once they inflate the price, such brokers will dump their stock to unsuspecting investors. Such investors will find that once they buy these stocks, there are no other buyers, with the result that the price will plummet.  Read our other articles on the type of scams that these OTC stocks are subject to.