Can Canadians buy over the counter (OTC) stocks?

Purchasing stocks can be a worthwhile investment if you do your research ahead of time. Nevertheless, you may have avoided buying stocks because they’re unfamiliar with the inner workings of the financial system. Maybe you have concerns about whether it’s legal to purchase over the counter (OTC) stocks in Canada.

Is it possible for a Canadian to buy OTC stocks? Could it yield serious financial dividends? Here’s how to determine whether a stock is over the counter, and what Canadians need to know about investing in these securities.

What are OTC stocks?

Over the counter stocks are those which are not formally listed on formal exchanges, such as the NASDAQ or NYSE. These formal exchanges are highly regulated and have certain standards that stocks have to meet in order to be traded on the exchange. Stocks that aren’t capable of being exchanged on major networks like the NYSE are instead referred to as “over the counter” or “OTC” stocks. They’re purchased through separate exchanges that aren’t as strictly regulated, which, in turn, makes them riskier for investors to dabble with.

Yet where there’s a risk, there may be a reward. This is why many investors like to purchase OTC stocks that they believe will perform well in the future despite their lack of qualifications, which prevent them from being traded on major exchanges such as the NASDAQ. While the US marketplace is the center of OTC stock trading in North America, Canadians can still access this unique market by relying on certain service providers.

Don’t be misled by the term “over the counter.” OTC stocks aren’t physically purchased and swapped over an actual countertop, as if you were purchasing something at a local store. The name is simply a historical remnant of how some stocks used to be purchased and referred to. Instead, you can invest in OTC stocks through certain dealers who manage their exchange with computers and phone calls, usually in return for fees.

Understanding the basics of investing

Before going any further, it’s imperative that you understand the basics of investing and the volatility associated with stocks before investing your money in anything. Even the world’s top-performing stocks are vulnerable to market volatility which could drastically affect their value in the event of a financial crisis or unexpected market development.

This isn’t to say that stocks aren’t worthy of your time, interest, or investment, but that you must exercise supreme caution when purchasing them. This is particularly true of OTC stocks, which are generally less regulated and not as certain to provide a valuable return as more mainstream and stable securities. That being said, many Canadians and US citizens find that stocks are worth considering.

Investing in OTC stocks as a Canadian

Investing in OTC stocks will be quite similar to investing in most stocks on major exchanges for Canadians. Specifically, you’ll be focused on accessing and partaking in the US market. This is because the United States stock market is generally the global golden standard, and there are far more opportunities available for you there than anywhere else. Luckily, it’s easier for Canadians to familiarize themselves with US stock practices than most other nations, given the overlapping language and geographic proximity to the market and its experts.

There are a few services you can look into to purchase OTC stocks as a Canadian:

• Over The Counter Bulletin Board (OTCBB) lists thinly-traded OTC stocks for those interested. Their rules mandate that companies that seek to have their securities quoted on OTCBB file financial reports, so there is some degree of regulation involved.

• Canadians can also make a margin account with Questrade to buy OTC stocks. This strategy is riskier than usual; your gains will be bigger, but your losses will be more severe when using a margin account. Margin accounts can be jointly owned, however, so they may be popular with couples or investment partners who want to cooperate.

• Want to talk to someone on the phone? The Canadian Imperial Bank of Commerce (CIBC) allows Canadians to purchase OTC stocks by contacting a live representative at 1-800-567-3343.

Most services that help Canadians purchase OTC stocks will charge fees when you make a purchase. Sometimes, the fee may be larger depending upon the size of your overall investment. Always ask a dealer questions about fees or costs associated with OTC trading to understand what you’re getting into. Carefully consider your options before investing your hard-earned money, and don’t be afraid to assess different providers if your first choice leaves you confused or uncertain.

Remember that OTC stocks, being more loosely regulated than others, are not guaranteed to soar upwards. If you hear chatter about a certain OTC stock that’s bound to gain value pretty soon, understand that this could be nothing more than gossip. Diligently conducting research before investing your earnings into OTC stocks is the only surefire way to mitigate the chance of your investment turning sour.

How to research OTC stocks

Begin by understanding that the advice of others is just that—advice. Not every prediction made by a third party is guaranteed to come true. Learn to appreciate the extent to which emotions can guide human decision-making in order to avoid becoming over-eager about any OTC stock, or any other financial asset that is prone to volatile changes in value.

OTC stocks aren’t usually required to provide as many financial filings to regulatory bodies or the public. Still, it may be worthwhile to check whether an OTC stock you’re interested in has any financial filings you can review before making a purchase. Transparency being optional doesn’t mean it ceases to exist.

Always be on the lookout for a “news catalyst,” or something in social media or mainstream news that could encourage the stock to move one way or another. Remember that OTC stocks are uniquely susceptible to volatility, meaning you’ll have to act fast to make some money during a rush period. Finally, look into the tax reporting requirements of your local area to avoid running afoul of any laws when you invest in OTC stocks.

Tax reporting requirements

Canadians shouldn’t just buy OTC stocks, wash their hands, and rest assured that the day’s work is over. Involving yourself with OTC stocks may entail additional tax reporting requirements. OTC stocks are often, though not necessarily, considered to be “non-qualified investments.” It’s safe to bet that any security that exclusively trades on an OTC exchange is non-qualified. Consider enlisting the help of an accountant who can inform you of any legal tax reporting requirements that could impact your decision to invest in OTC stocks.

So, can Canadians buy OTC stocks?

Canadians can indeed buy OTC stocks, but they should always be careful when investing in such a risky asset. Many OTC stocks are considered penny stocks, meaning they’re very lightly valued and may be more volatile than mainstream assets with larger financial backings. Still, not every OTC stock is an incredibly risky asset that couldn’t make it on a major exchange like the NASDAQ. Indeed, some OTC stocks aren’t listed on major exchanges for good reasons.

It’s not a financial Wild West just because certain assets like OTC stocks and cryptocurrencies aren’t as thoroughly regulated as more mainstream options. Some OTC stocks used to be traded on major exchanges like the NASDAQ or NYSE but may have been delisted for any number of reasons. Others are explicitly OTC stocks because the companies deliberately want to avoid having to file reports to the SEC or other financial authorities. Not all OTC stocks represent tiny companies; Volkswagen AG (VWAGY) and Nestlé S.A. (NSRGY) are two examples of prominent companies with stocks listed on the OTC market.

Brokers who deal with OTC stocks should happily be able to walk you through the process of funding your investment account and finding the stocks you’re curious about buying. Certain platforms or brokers may restrict OTC exchanges for a variety of reasons; you may not be allowed to purchase OTC stocks with a registered account, for instance. Remember that the past performance of any OTC stock is not a guarantee of future performance. Exercise extreme caution whenever buying an OTC stock as a Canadian.

So, what are you waiting for? There’s a new world of wealth out there waiting to be explored. Remember to be careful as you consider OTC stocks, and soon enough you’ll be trading your way to a brighter future.