What is the OTC Market? Is it Safe to Buy OTC Stocks?

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One of the goals of this site is to educate investors about not only about potential investment opportunities but also help them learn about some of the basic concepts and topics in the investment world. In the past I have written many posts which are more educational in nature based on reader requests. The following are three such posts that were well received:

Following the series, in this post let us discuss about the OTC market and a few relevant facts about that market and securities.

1.What is the OTC Market?

The Over-The-Counter (OTC) Market is a market where stocks that are not listed on the major exchanges such as the NYSE and NASDAQ trade. It is an electronic market where is no exchange to monitor the transactions.

2.How many stocks trace on the OTC Market?

Nearly 12,000 stocks trade on the OTC market.

3.What are the other securities that trade on this market?

In addition to equities, investors can trade ETFs, ADRs, Foreign Ordinary Shares, Preferred Stocks, Warrants, etc. on the OTC market

4.Is it safe to buy stocks on the OTC market?

It depends. There are many questionable companies that trade on this market. So the key is to identify large high quality public companies and invest in them.

Investors need not avoid it like the plague since doing so will lead to missing out on some good opportunities.

5.Why do foreign companies trade on the OTC?

Foreign firms that do not want to deal with cumbersome reporting regulations of the SEC and/or want to avoid the expensive listing fees of the exchanges prefer this market. For instance, a few years ago the listing fees on the NYSE was $50,000 per year.

6.What type of foreign firms are found on the OTC market?

From tiny foreign firms to multi-billion dollar giants can be found on OTC market. For instance, German utilities like E.ON(EONGY) and RWE AG(RWEOY), Australian banks such as National Australia Bank(NABZY) and Common Wealth Bank(CMWAY),

7.Are Canadian companies traded on the OTC market?

Yes. For example Canadian Utilities Ltd (CDUAF) trades on the OTC.

8.Where to find all the companies or securities traded on the OTC?

The Stock Screener on the OTC markets website has this info.

Sources:

Disclosure: Long RWEOY, EONGY, NABZY

The Psychology of Retail Investors: Chart

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One of the main factors that differentiates successful investors from average or unsuccessful investors is psychology. This is especially true with retail investors. Many retail investors are prone to timing the market. Instead of having a long-term view and being patient they try to  get in and get out of the market at perfect times. This is of course impossible to execute in real life since markets are unpredictable. However human psychology is such that we are overconfident and assume we can beat the market despite mountains of evidence to the contrary. The following is a caricature of a typical retail investor’s psychology:

Click to enlarge

Source: A caricature of retail investors psychology, Investment Office

Will Inflation Hurt Stock Returns? : Chart

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US equity markets have been more volatile in the past few weeks. Investors are worried about a variety of factors such as growing debt, rising bond yields, China, excessive valuations and of course the most important of all – inflation.

It is widely accepted that stocks are the best asset class to own to beat inflation in the long-term. But what about the short and medium-term? Does inflation negatively impact stock returns? A recent post at Dimensional provides some answers. From the article:

Since 1991, one-year returns on US stocks have fluctuated widely. Yet weak returns occurred when inflation was low in some periods, and 23 of the past 30 years saw positive returns even after adjusting for the impact of inflation. That was the case in the first six months of 2021, too (see Exhibit 1).

 

Past performance is no guarantee of future results.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Copyright 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Over the period charted, the S&P 500 posted an average annualized return of 8.5% after adjusting for inflation. Going all the way back to 1926, the annualized inflation-adjusted return on stocks was 7.3%.

Source: Will Inflation Hurt Stock Returns? Not Necessarily., Dimensional Fund Advisors

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No positions

Timeline on the Disintegration of the USSR: Infographic

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Opne of the major events of the last century was the dissolution of the USSR. Not only did it lead to the demise of the other superpower but also ended up creating a bunch of new countries. Though militarily Russia is still a superpower economically and politically its power has diminished with the collapse of the USSR. Kristyna Foltynova at RadioFreeEurope/Radio Liberty recently posted an excellent infographic noting the important events leading to the demise of the USSR. A short excerpt from that infographic:

On December 25, 1991, the Soviet Union ceased to exist as a sovereign state. Its collapse was gradual and, some would say, even inevitable. Here are some major milestones in the dissolution of the U.S.S.R., which put 15 new countries on the map.

How Did It Start?

The Soviet Union was once the largest country in the world, covering more than 22 million square kilometers. It consisted of 15 Soviet socialist republics but was highly centralized for most of its history. Although the U.S.S.R.’s official language was Russian, more than 200 other languages and dialects were spoken, and it was home to more than 290 million people of various ethnicities.

According to some, the dissolution of the Soviet Union began when its last leader, Mikhail Gorbachev, came to power and introduced reforms that were aimed at ensuring more democracy and economic prosperity. There were others, however, who also played a significant role in the last days of the U.S.S.R.

 

See the complete infographic at the RFE/RL site here.

Source: The Undoing Of The U.S.S.R.: How It Happened, RFE/RL