OTC stocks

I’d like to get people’s opinions about buying and owning Over The Counter (OTC) stocks.

I’m not talking about obscure, tiny penny stocks with dubious business models. I’m talking about generally large, well established international stocks, with proven business models, that don’t feel the need to list in the US, but have liquid listings in reputable, well regulated international stock markets.

I can’t speak for TMF, but the fact that they have recommended several OTC stocks implies that they have no reservations about owning the “right” OTC stocks.

Some matters that I hope people can address include the following:

(1) Is there anything to be especially aware of when buying and holding OTC stocks?

(2) Is there an ongoing cost in holding OTC stocks? After all, I believe that their listings are sponsored by a US bank, which presumably gets paid somehow.

(3) Is holding an OTC stock pretty much equivalent to holding the stock on its home exchange?

(4) Are OTC stocks particularly illiquid in times of market distress?

(5) Is your ownership of OTC stocks less certain than stocks on their home exchange, because you are reliant on the sponsoring bank truly owning a home exchange listed stock for every OTC stock that it sponsors?

(6) Any other relevant matter to take into account?

Any help and advice would be much appreciated, and I thank everyone in advance.

Kind regards,
Bombora

Disclosure: no OTC stocks owned

  1. An ADR that trades OTC is the functional equivalent of owning it on the home exchange, except for the difference in liquidity.
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Bombora,

As the previous owner of several European blue chip ADRs that went from the NYSE to the OTC market because of expense and onerous filing requirements, I understand your trepidations. I also held a Chinese stock that descended from the NYSE to the pink sheets and eventually to the “grey market.” No more Chinese stocks for me.

As to the European ADRs, I’ve always used limit orders and selling them in those days was more expensive. You need to check with your broker regarding all fees involved. This may vary from security to security and also from country to country. Since I held those ADRs, the OTC market has evolved into a three tier market: https://www.otcmarkets.com/learn/otc-market-tiers. From your post I gather you will only be interested in the OTCQX market (https://www.otcmarkets.com/marketplaces/otcqx) which lists some of the finest global brands, https://www.otcmarkets.com/research/otcqx-company-list. Except for my Chinese stock, this is where I sold my ADRs (all of them blue chips) without any problem, difficulty, or delay. To get rid of the Chinese stock took forever and was quite expensive.

To alleviate any angst in dealing with the OTC market, I also reccommend to also check the following websites:
SEC: https://www.sec.gov/divisions/marketreg/mrotc.shtml
FINRA: http://www.finra.org/industry/otcbb/otc-bulletin-board-otcbb….

I have not answered several of your specific questions, because I do not know how experienced an investor you are nor do I know how much money per security you wish to invest. My broker, Schwab, in their series of “Going Global,” states the following in one of their 2014 publications (http://www.schwab.com/public/schwab/nn/articles/Going-Global…)

ADRs (American Depository Receipt stocks) are useful for smaller positions, many having adequate liquidity. They can be traded online during U.S. market hours and are generally marginable.

Foreign Ordinaries stocks listed in the U.S. OTC market are an alternative for smaller positions, however, the costs tend to be higher than ADRs and the liquidity may not be as strong.

Foreign stocks listed in their local market are often the better alternative for orders greater than $5,000, due to their increased liquidity and cost.

See their table of comparison of these three types of stocks. It should answer most of your questions.

I have been considering switching to a Schwab Global Account (http://www.schwab.com/public/schwab/investing/accounts_produ…) where you can trade stocks directly online in 12 of the top-traded foreign markets in their local currencies (Australia, Belgium, Canada, Finland, France, German, Hong Kong, Italy, Japan, Netherlands, Norway, United Kingdom). It also allows you to take advantage of currency fluctuations. When the USD is high, you can purchase these securities more cheaply. When the USD is low and you sell, you make more money. The reason I sold all my ADRs is that in my experience ADRs and Foreign Ordinaries take a more severe beating when the U.S. market tanks. It seems for no other reason than that they are foreign. They also seem to take longer to recover than the rest of the U.S. market. Often the local market (London, Paris, Frankfurt) does not show such a steep decline and at times no decline at all.

With the Schwab Global Account you get real-time quotes during foreign market hours, can view multi-currency statements and at the same time you can hold ADRs or Foreign Ordinaries in USD if you so desire. They have a Global Investing Specialist at an 800 number to assist you with decisions. As to the Trading Commissions in Foreign Currencies and applicable Foreign Currency Conversion Fees, see “Account Pricing.” Commissions for ADRs and Foreign Ordinaries are as follows:

ADRs $4.94 online, $29.95 broker assisted
Foreign OTC stocks $54.95 online, $79.95 broker-assisted!

I hope you’ll find the answers needed to decide what to do, once you have slogged through all the information.

Good luck and happy foreign investing,

im
Disclosure: OTC stocks owned previously, none now

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I would expect that Interactive Brokers also makes it pretty easy to trade foreign/OTC stocks.