A Must-Read for Stock Investment Beginners: What's the Difference Between Listed, OTC, and Emerging Markets? An Article to Help You Understand How to Buy!

Which of the three stock markets should you start investing in?

In Taiwan’s stock market, you will hear the terms “Listed,” “OTC,” and “Emerging.” These terms represent different tiers of trading markets, corresponding to varying risks and returns. But what exactly does Emerging mean? How do these three markets differ? For novice investors, understanding these concepts is the first step toward successful investing.

Understanding the Three Major Stock Trading Platforms

Listed Stocks: The Most Mature Investment Choice

What is listing?

Listing refers to a company’s official registration and trading on a formal securities exchange. In Taiwan, listed companies trade on the “Taiwan Stock Exchange” (TWSE); in the US, they are traded on the New York Stock Exchange (NYSE) and NASDAQ.

Listed companies are usually large, well-established firms such as TSMC, Delta Electronics, MediaTek, etc. To qualify for listing, companies must meet strict standards set by the exchange and disclose financial data quarterly after listing. Companies that fail to meet requirements are delisted.

Features of listed stocks:

• High trading volume and excellent liquidity, tradable at any time
• Relatively moderate stock price fluctuations, lower risk
• High transparency of financial information, suitable for beginners and conservative investors

OTC Stocks: Balancing Growth Opportunities and Moderate Risks

What is OTC?

OTC trading occurs at the “Taipei Exchange” (TPEx). Unlike listed stocks, OTC trading involves broker-dealer holding stock inventories to facilitate transactions, rather than centralized exchanges. The OTC market not only trades stocks but also includes bonds, foreign exchange, cryptocurrencies, ADRs, and derivatives.

OTC companies have looser screening standards, attracting many growth-oriented and mid-sized firms. These companies often have rich themes and high growth potential.

Features of OTC stocks:

• Lower entry barriers than listed stocks
• Larger stock price fluctuations, but more growth opportunities
• Suitable for investors willing to accept moderate risk and seeking growth stocks

Emerging Stocks: A Stage for High Risks and High Rewards

What does Emerging mean?

Emerging stocks are companies that have not yet met OTC standards but wish to raise funds publicly and build market recognition. Common emerging companies include startups, biotech and medical device R&D firms, small and medium enterprises, and teams with promising themes.

Features of emerging stocks:

• No price fluctuation limits; stock prices can fluctuate wildly
• Very low trading volume and poor liquidity; difficulty buying or selling
• Much lower financial transparency than listed or OTC stocks; incomplete disclosures
• Opportunities and risks coexist; not recommended for beginners to enter impulsively

A Full Comparison of the Three Markets

Where to Trade? Operational Differences

Trading Listed Stocks

Taiwan-listed stocks:

Open a securities account with a Taiwanese broker to trade.

US-listed stocks:

Open an account with an overseas broker or use domestic broker’s custodial services. US stock trading hours are based on Eastern Time (ET), Monday to Friday, 9:30–16:00. Due to time zone differences, Taiwanese investors trade in the evening:

• Summer Time (Mar–Nov): 21:30–4:00 Taiwan time
• Winter Time (Nov–Mar): 22:30–5:00 Taiwan time

US markets are closed on public holidays; investors should pay attention.

Trading OTC Stocks

Taiwan OTC stocks:

Require placing orders through a securities broker, signing an account agreement, and completing procedures.

US OTC stocks:

Most overseas brokers support trading OTC stocks. Main OTC markets in the US include:

1. OTCQX — Best Market — Most regulated

The most regulated OTC market. Penny stocks, shell companies, and bankrupt firms are not allowed. Companies must report financials to the SEC and disclose information. Many already listed overseas or planning to list on NYSE or NASDAQ are here.

2. OTCQB — Venture Market — Moderately regulated

Between Best Market and Pink Market. Focuses on early-stage and developing companies. No minimum financial standards, but companies must submit annual financial reports compliant with accounting standards; bankrupt companies are excluded.

3. Pink Market — Pink Sheets — Least regulated

A chaotic market with almost no entry barriers. Companies only need to submit a form to FINRA to list, with no requirement to disclose financials or register with SEC. Highest risk level. (The protagonist in the movie “The Wolf of Wall Street” was involved in pink sheet stocks.)

Trading Emerging Stocks

Purchasing emerging stocks is the most complex process. First, confirm that the broker has “Emerging Stock Trading Qualification,” then open the trading function either at the counter or online. Due to high risk, additional documents like risk warnings must be signed.

After activation, only “cash” orders are supported; margin trading, short selling, or day trading are not allowed. Transactions are in lots of 1,000 shares. Emerging stocks are negotiated directly rather than automatically matched, resulting in slower execution, larger price jumps, and no fluctuation limits, with relatively low liquidity.

Suitable for: High risk-tolerant investors, those familiar with individual stocks research, with small capital allocation, and engaged in momentum trading.

How Strict Are the Listing and OTC Application Standards?

Listing Application Conditions

Taiwan Stock Exchange (TWSE): Requirements include

1. Registered under the Company Act for over 3 years
2. Paid-in capital of NT$600 million or more
3. Pre-tax net profit meeting specific standards (e.g., over 6% in the past two years or over 3% over five years)
4. At least 500 shareholders besides insiders, holding over 20% or 10 million shares

US Stock Listing: Standards vary by exchange

NYSE generally has higher requirements than NASDAQ. NASDAQ subdivides into three markets:

• NASDAQ Global Market: Highest standards
• NASDAQ Capital Market: Medium standards
• NASDAQ SmallCap Market: Lowest standards, designed for startups

For example, a company without profits but with 2 years of operation and 5 million shareholders’ equity can list on NASDAQ. US listing standards are relatively more flexible and accommodating.

OTC Application Conditions

Taiwan OTC: Relatively lenient

1. Registered under the Company Act for at least 2 full fiscal years
2. Paid-in capital of NT$50 million or more
3. Pre-tax profit ratio over 4% in the most recent year or over 3% in the last two years
4. At least 300 shareholders besides insiders, holding over 20% or more than 10 million shares

US OTC: Much lower than listing standards

Either the Best Market or the Risk Market only requires submitting a series of documents and ensuring the stock price has not fallen below $0.01 in the past 30 days. Entry into Pink Sheets only requires submitting a single form.

Investment Returns vs. Risk Assessment

Listed Stocks: The Benchmark for Stable Returns

Investment advantages:

• High return potential: According to Motley Fool, the S&P 500’s average annual return over the past 30 years is about 10%, far exceeding bonds’ roughly 5%
• Passive dividend income: Many listed companies regularly pay dividends (usually quarterly), returning profits to shareholders
• Strong inflation hedge: Stock market returns generally surpass inflation. The S&P 500’s 30-year return is 10%, Dow Jones 8.7%, easily offsetting currency depreciation

Investment risks:

• Market volatility risk: Short-term losses of 10% or more are common
• High research costs: Requires time to learn fundamental and technical analysis, and continuous monitoring of companies and markets

OTC Stocks: Growth and Volatility Coexist

Investment advantages:

• Wide investment scope: Many overseas-listed companies avoid secondary listing, choosing OTC markets, providing more options (e.g., Volkswagen VWAGY.US trading on Pink Sheets)
• Low entry cost: Stocks are cheaper; a $1 stock rising to $1.50 yields a 50% return

Investment risks:

• Limited regulation: OTC companies disclose far less data than listed companies; Pink Sheets almost no disclosures, making them highly speculative and risky
• Low trading volume: May face “no market” situations, unable to buy or sell, leading to failed or delayed trades, large bid-ask spreads
• Market sensitivity: OTC stocks are highly sensitive to macroeconomic data releases, with sharp volatility during such times, unfavorable for trading decisions

Practical Advice for Beginners

For new investors, it is recommended to start with listed stocks and consider OTC only after gaining experience. Before investing, consider the following:

Assess Your Financial Situation

Clarify how much capital you can invest. Calculate income, living expenses, debts, and savings to scientifically evaluate your investable amount. Investing is a way to grow wealth, not a get-rich-quick scheme. Never invest all your assets in the stock market impulsively.

Do Basic Analysis and Research

Mastering investment knowledge helps make more accurate decisions. Reading financial reports and earnings calls is essential. Beginners can also refer to industry reports from investment institutions, which are processed by analysts and easier to understand.

Set Clear Investment Goals

Goals lead to success. Set monthly and yearly financial targets and implement investment plans consistently. Without goals, you may be overwhelmed by daily news and short-term fluctuations. Clear goals help you stay rational and unaffected by market noise.

Final point: Regardless of the market chosen, risk management is paramount. Set stop-loss points, control position sizes, and maintain psychological balance—these are keys to long-term investment success.