Penny stocks are typically not listed on UK stock exchanges, like the LSE. Instead, they are traded through a different method called Over The Counter (OTC), which is why they are also called OTC stocks.

When trading penny stocks and other OTC securities, it’s important to understand some key definitions.

Penny Stocks vs. OTC Stocks

OTC stocks include all stocks that are not traded on a UK stock exchange. Instead, they trade through broker-to-dealer networks. Most penny stocks do trade over the counter, but not all OTC stocks are small.

OTC stocks can be big or small, foreign or domestic, or can deal in products that are considered illegitimate in some places, like marijuana stocks.

What OTC stocks have in common is:

• Lack of information: Because of not having the same reporting requirements as stocks traded on major exchanges, many OTC companies offer little information for public analysis, and stock analysts rarely cover them. Without this data, it can be difficult to know which companies may have a weak business track record, or be on the brink of bankruptcy.
• Low liquidity: Traders may find it difficult to get orders filled near their desired price, and large orders can easily move the price. In the case of penny stocks, a move of a few cents can mean a major percentage gain or loss, illustrating the tremendous volatility.

OTC Markets

OTC markets are where securities trade via broker-to-dealer network. They are decentralized, thus less transparent and less regulated than traditional stock exchanges, which makes them riskier to invest in.

OTC trading can involve the following securities:

• Stocks
• Bonds
• Forex
• Cryptocurrency
• Derivatives

Pros and Cons of OTC Markets

 

Pros	Cons
OTC offers access to a wide range of securities, including penny stocks, which may not be listed on major exchanges.	OTC stocks often have lower trading volumes, making it challenging to buy or sell shares at desired prices.
OTC allows for more flexibility in trading hours, enabling investors to trade outside regular exchange hours.	OTC markets generally have less stringent regulatory oversight, which can expose investors to increased risks, such as fraudulent activities and manipulation.
OTC stocks, particularly penny stocks, have the potential for significant price fluctuations, which can result in large returns for investors who make successful trades.	OTC stocks tend to exhibit higher price volatility on the release of market and economic data.