Trading Stocks in the Underground Economy

OTC markets house a lot of companies rejected from the TSX because their stocks are not adequate enough to be publicly traded.

By Jessica Vitullo, Staff Writer

The Toronto Stock Exchange (TSX) offers consumers the opportunity to invest in a wide variety of reputable companies. Buyers and sellers are constantly trading different stocks at different prices in hopes that this investment will turn over a higher profit. All of the transactions made in the capital market are recorded and must follow the guidelines the Canadian government has set to make sure that trading is done fairly and legally.

[pullquote]Without the OTC markets, companies are at risk of going without much needed investor capitol. If this happens, jobs are at risk of being lost[/pullquote]

But while the TSX is a public trading market that cannot hide any transactions, over-the-counter (OTC) trading is becoming even more popular because of its flexibility, prices and new investors. OTC markets, also known as the underground economy, means stocks are sold between buyers and sellers privately. They are not recorded or reported like with the stock market. Trades are privately made on the CanDeal, CBID or CanPx markets.

OTC markets provide risky investments that would not normally be allowed on the TSX. This is the sole reason why many companies choose to sell stocks privately, as some companies are not large enough to survive in the bigger markets.

For example, if a company offers stocks to investors and they are not sold regularly or the company is not reputable enough to be publicly traded, OTC markets or pink sheets become a way into investing. Pink/OTC markets give companies the opportunity to earn more money and offer consumers new investment opportunities that the TSX cannot provide.

Because of this flexibility inherent in the OTC markets, investors have been keen on buying and selling within them to the point where the amount of Canadian companies joining these markets doubled at the end of 2009. As a result, those companies that joined, big or small, faced a lot of competition while seeking the help of the underground economy.

Overall, the Canadian companies that joined the OTC markets have been generating a lot of money. As well, the market is open to both traders in Canada and the United States, meaning more money can be invested across the border. So why wouldn’t all Canadians want to hone in on this money-making market?

OTC markets house a lot of companies rejected from the TSX because their stocks are not adequate enough to be publicly traded. This is why Pink OTC Markets Inc., a market that trades stocks over-the-counter, has set up special icons to guide buyers when purchasing stocks. If the market believes a particular stock is not worth buying, a skull with crossbones is attached to its name.

However, without the OTC markets, companies are at risk of going without much needed investor capitol. If this happens, jobs are at risk of being lost. Yet by trading over-the-counter, businesses have a chance of surviving and their employees may continue to hold their employment, thus benefiting the economy overall.

As always though, it is up to the buyers to decide. Investors can turn a profit from low-priced stocks. It just takes time, as there are always fluctuations in the stock market.

But to be sure, the OTC markets are no secret to anyone. The government is well aware of the fact that stocks are being traded outside the TSX and is also well aware how they do not follow regulations made for stock trading.

In all, little is being done to stop the underground market because it is simply not a concern for upper management. Regulators realize there are more important concerns to worry about involving the TSX. Plus, OTC markets give other companies the ability to make trades. This aspect of trading is only a sliver of the entire trade market.

By Jessica Vitullo, Staff Writer

In association with:

The ARB Team
Arbitrage Magazine
Business News with BITE

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