Disclaimer: Lean Investments is a financial education and entertainment website. None of the content below should be misconstrued as investment advice or a recommendation. The author holds none of the positions mentioned below.
The Robinhood app offers investors access to no less than 5,000 stocks, according to information on Robinhood.com. The company goes on to say that investors have access to “most” US equities.
There is one notable group of stocks that Robinhood Financial does not offer to its investors: OTC penny stocks.
This means that OTC stocks from emerging sectors such as cannabis, biotech, solar and various technology sectors are NOT available through Robinhood Financial or the Robinhood app.
Those who want to deploy active trading strategies with the notoriously volatile OTC penny stocks need to look for another broker. This is why veteran penny stock trader Tim Sykes advises his followers to not trade his strategies on the Robinhood app.
Below we cover what OTC stocks are, which type of OTC stocks are available on Robinhood and the large group that are not, as well as considerations before investing or trading in OTC stocks.
What are OTC Stocks?
Before we detail the types of OTC stocks available to Robinhood app investors, we need to define what an OTC stock actually is.
OTC stands for “over-the-counter.” This designates that OTC stocks are not listed on mainstream stock exchanges like the NYSE, NASDAQ or AMEX, but rather traded directly between individual parties without the intermediary of an official exchange. As they are not listed and regulated by major exchanges, OTC stocks carry a negative reputation in the financial community and are often prone to market manipulation, unpredictable volatility and promotional pump and dump schemes. The saying “caveat emptor” should always be front of mind with OTC stocks.
OTC stocks are grouped into three separate markets that indicate levels of risk and liquidity. The OTC Markets Group maintains price and liquidity information for more than 10,000 different OTC stocks in the following markets:
- OTCQX – The category of OTC stocks with the highest reporting requirements and features many name brand international stocks offer their shares OTC to US investors.
- OTCQB – This category requires stocks to trade for a minimum of $0.01 per share and also has a number of listing and reporting requirements.
- Pink – Pink sheet stocks are the Wild West of the stock market; there are no reporting requirements or financial standards. Most stocks that trade on Pink Sheets have serious financial issues and may not be viable as legitimate investments.
OTC Stocks Available on Robinhood: International
The Robinhood app offers investors some OTC stocks, but generally only those from multinational and major foreign firms that offer US investors OTC shares as an alternative to buying the company’s shares directly on their foreign exchanges. Many reputable international companies choose to list their shares OTC to avoid having to duplicate their operations and accounting practices for US exchanges.
Notable OTC stocks available on Robinhood include:
- Nestle (NSRGY)
- Nintendo (NTDOY)
- Tencent (TCEHY)
- Ping An Insurance (PNGAY)
- Roche (RHHBY)
- Rakuten (RKUNY)
- Bank Rakyat Indonesia (BKRKY)
- Swiss RE (SSREY)
- Jardine Matheson (JMHLY)
- Softbank (SFTBY)
In most cases, the five letter stock ticker is an indication that the stock trades as an OTC offering.
OTC Stocks Not Available on Robinhood: Penny Stocks
While Robinhood does offer some OTC shares, they are likely not what you first think of when you think of OTC stocks: penny stocks. Most OTC shares that are not issued from reputable multinational and international companies such as the ones listed above are issued by very small US companies of wildly varying quality and future prospects.
Some sectors that OTC penny stock traders tend to flock to include:
- Cannabis stocks
- Biotech, including many vaccine stocks
- Solar and clean energy stocks
- Blockchain and bitcoin stocks
- Emerging technology stocks
- Distressed retail stocks
The vast majority of OTC stocks in these sectors are not available on the Robinhood app.
OTC Stock Risks
So why does Robinhood limit offering access to OTC penny stocks that many of its traders and investors would like to have available?
It likely comes down to risk. Many Robinhood investors are first-time investors and navigating individual stocks from major exchanges is already challenging enough. It’s likely Robinhood Financial does not want to expose its investors to the level of risk inherent in OTC penny stocks.
The risks of OTC stocks are many. They include:
- Low liquidity – Many OTC stocks suffer from a lack of liquidity, or active buyers and sellers. This means that it can be hard to buy the stock at a desirable price and sell it at the right moment.
- High volatility – Due to the lack of liquidity, OTC stocks are often extremely volatile. It’s not rare to see OTC penny stocks rise 100% in a single trading session, nor is it unusual to see an OTC dramatically collapse and lose most of its value in one trading session.
- Pump and dump schemes – Adding to the volatility is the prevalence of promotional schemes, sometimes from executives of the OTC stocks themselves and sometimes from shady third-parties on Twitter. OTC penny stocks are often “pumped” from a news release or social media post, traders and investors pile in, pumping up the price, before the insiders who instigated the promotion cash out, leaving the unsuspecting investors remaining in the stock “holding the bag.”
- Lack of transparency – OTC stocks have fewer reporting and regulatory burdens so it’s difficult for average retail investors to truly understand what is going on inside the company. OTC stocks often suffer from toxic financing, and will regularly issue new shares out of the blue or see major insider selling before average investors can react.
- Fraud – The high volatility and lack of transparency in OTC penny stocks creates an environment where fraud can thrive. Many OTC penny stocks exist only as trading vehicles and the companies that back them have no chance of ever being profitable. This creates negative incentives for unscrupulous third parties and company executives to pump the shares without any real business activity backing it.
All of the above risks partly explain why Robinhood Financial, which already faces scrutiny for allowing new investors access to high-risk options and meme stocks, may not want to offer OTC penny stocks to their customers.
Which Brokers Have Better Access to OTC Penny Stocks?
If you have reviewed and understood the risks of OTC penny stocks but still want to trade them, other US brokers offer a wide range of OTC stocks, including Interactive Brokers and TD Ameritrade. Those seeking to trade in the style of Tim Sykes, with all the risks that entails, should choose one of these full-service brokers, which are also better set up for active trading strategies than the Robinhood app.