A person who would like to purchase, or sell, or otherwise trade in securities known as over the counter (OTC) Stocks could look for such stocks at the Over the Counter Bulletin Board, also known as the OTCBB.
The OTCBB is a regulated electronic quotation service that displays quotes, sale prices, and volume of sale information of OTC Stocks. The OTC Stocks include warrants, US-company issued stocks, and shares of foreign company stocks.
The OTCBB has over 5,000 companies that have OTC stocks quoted in its electronic quotation service. These different OTC stocks are dealt with by the Market Makers. There are currently over 400 Market Makers in the OTCBB.
The OTCBB is a regulated electronic quotation for securities and company stocks that are sold over the counter, and not a stock exchange. Among the important differences between stock exchanges and the OTCBB is the way stocks and securities are traded. Stock exchanges have automated trade executions on matching buying/selling prices, while at the OTC stocks market, a Market Maker may choose not to buy or trade stocks that they deal with.
These market Makers are the dealers that function much like Securities Specialists in the stock exchanges. They compete to buy and sell the shares that are traded in the OTCBB. They set their own bid prices and ask prices for the OTC stocks traded on the market.
The market makers make their profit from the spread between the bid price and ask price of the OTC stocks that they are dealing with. Competition between market makers places a limit on the spread or profit that they can make from a particular OTC stock. The market maker with the best deal for a particular OTC stock will be the one that investors would choose to do a transaction with.
Let us explore an example of how such an OTC stock trade works, with two market makers, both dealing with a an OTC stock XYZ, a stock that trades at $ 0.52 at the end of the previous trading day. Let us assume that the market makers both have the same volume of XYZ stock at the start of the current trading day.
Market Maker A sets his bid for OTC stock XYZ at $ 0.50 and his ask at $ 0.55. This means he will buy XYZ stocks from investors at $ 0.50 and sell the same stock for $ 0.55. His spread is $ 0.05.
Market Maker B is another market maker that deals with OTC stock XYZ, and decides that his bid for the stock is $ 0.51 and asks $ 0.55. That makes Market Maker’s Bs spread to be $ 0.04.
Between Market Maker A and Market Maker B, investors will most likely sell their OTC stock XYZ to Market Maker B. Investors will buy XYZ OTC stocks from either Market Maker A and B, since they sell at the same price. Eventually, Market Maker B can have more XYZ stocks on hand than Market Maker A, and Market Maker B can profit from more sales volume than Market Maker A.
Other Market Makers can choose to trade in the XYZ OTC stock that Market Makers A and B have been competing in, and set their bid and ask prices according to their discretion. Market Maker C can join the fray at any time, and expecting that the XYZ OTC stock would rise in value, he sets a bid price of $ 0.53 and ask price of $ 0.56.
The OTC stock quotes made by these Market Makers are all shown at the OTCBB in real time, as well as any transactions that are made for each OTC stock last sale price and volume traded included.
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