Can You Buy OTC Stocks on Robinhood? (Explained)

    If you have logged into your Robinhood account just to find out that you cannot trade the stock you wanted, you are probably asking yourself if you can buy OTC stocks on Robinhood.

    In this article, we will answer some common questions about trading penny stocks and OTC stocks on Robinhood.

    Can you trade OTC stocks on Robinhood?

    No, Robinhood does not support allowing its customers to trade stocks that trade on the OTC markets. The reasons are mainly due to the low liquidity of these securities, and also the fact that Robinhood does not charge commissions.

    Trading OTC stocks usually involve higher fees than any other stock traded on major exchanges. For this reason, Robinhood does not have these stocks available to its customers.

    Can you trade penny stocks on Robinhood?

    While you are not able to trade stocks on the OTC markets exchange, you are able to trade other penny stocks that are listed on major exchanges. Penny stocks involve any stock that trades under $5 per share, and there are plenty of those in some of the major exchanges like the Nasdaq and NYSE.

    Why Robinhood does not have certain stocks

    There are three main reasons why Robinhood does not support stocks listed on OTC markets:

    • Liquidity
    • Higher commissions
    • Payment for order flow (PFOF)

    Liquidity

    OTC stocks are known for being illiquid, and this carries an additional amount of risk. Not only for investors in these stocks but also for the broker if their customers are using margin to trade these stocks.

    Illiquid stocks also tend to be more volatile and carry additional risks that not all investors are aware of.

    Higher commissions

    Another important reason why Robinhood does not allow its customers to trade OTC stocks is that commissions and fees to trade these stocks are higher.

    Robinhood was built with the intention of bringing finance to everyday people and avoiding charging their customers fees on every trade. If they were to allow their customers to trade OTC stocks, they would have to start charging a fee for every order executed.

    Payment for order flow (PFOF)

    Lastly, the reason that Robinhood is able to make money is through payment for order flow. This means that the broker will sell the order flow to market makers. However, since the volume traded on OTC stocks tends to be low, market makers might not be so willing to pay for the order flow of illiquid securities.

    Where can you buy OTC stocks?

    Although Robinhood does not offer OTC stocks, there are several other brokers that do. 

    Here are some of the main brokers where you can trade OTC stocks:

    • Interactive Brokers
    • Fidelity
    • TD Ameritrade
    • Charles Schwab
    • TradeStation

    Conclusion

    Although Robinhood does not allow you to trade OTC stocks, there are several other brokers that do, and with very low commissions in some cases. If you want to trade these stocks you might want to consider having multiple brokerage accounts, to reap the benefits offered by each broker.

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