Over-the-Counter OTC Stock Market Definition The Motley Fool

Trading foreign shares directly on their local exchanges can be logistically challenging and expensive for individual investors. In this article, we’ll examine what OTC markets are, how they differ from traditional stock exchanges, and the advantages and disadvantages for investors. We’ll explore the key OTC market types, the companies that tend to trade on them, and how these markets are evolving in today’s electronic trading environment.

Bonds, including bonds bundled into ETFs, are not usually traded on centralized exchanges. Instead, most are exchanged OTC on the secondary market via broker-dealers. It is possible to find an up-and-comer stock and buy a lot of shares early on. Because OTC stocks are inexpensive, your money could go further than it does with other types of investments.

• A stock must meet size, profitability, and trading activity criteria to be eligible to trade on an NMS exchange.
• Brokerage services for alternative assets available on Public are offered by Dalmore Group, LLC (“Dalmore”), member of FINRA & SIPC.
• Visit the Information for Pink Companies section of our website for further details.
• We’ll also discuss some other key information you should know before you decide whether OTC stocks are right for you.

Identify your exit points for both profit and loss on each of your stocks and stick to them as part of your overall trading plan. You created the plan without emotion, and it needs to be executed without emotion. What gets measured gets managed, so monitoring and tracking your OTC stocks is essential.

Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. The over-the-counter (OTC) market helps investors trade securities via a broker-dealer network instead of on a centralized exchange like the New York Stock Exchange. Although OTC networks are not formal exchanges, they still have eligibility requirements determined by the SEC.

Below is a table distinguishing the differences between trading OTC and on a regulated exchange. This means that you can buy and sell shares in the business, but the Over-the-counter Trading stock does not appear on a major exchange. This is necessary for those investments that don’t meet the stringent requirements of listing on recognized exchanges.

Apple Inc. (AAPL) and Microsoft Corporation (MSFT) traded OTC, as did many long-forgotten penny stocks. Over-the-counter (OTC) markets are stock exchanges where stocks that aren’t listed on major exchanges such as the New York Stock Exchange (NYSE) can be traded. The companies that issue these stocks choose to trade this way for a variety of reasons. While OTC markets offer greater flexibility and fewer barriers to entry than traditional exchanges, they also come with exceptional risks and challenges. Nevertheless, because OTC-traded securities are subject to less stringent reporting and disclosure requirements, investors may have limited access to reliable information about the companies they are investing in.

OTC markets don’t have the oversight or conditions that major exchanges have. Because many companies that trade OTC stocks don’t have a long history, you also won’t find a lot of information when researching potential stocks. Some specialized OTC brokers focus on specific markets or sectors, such as international OTC markets or penny stocks. These brokers may provide access to a wider range of OTC securities but may also charge higher fees or have more stringent account requirements or minimum transaction sizes.

There is also less liquidity for OTC securities compared to major exchanges because there are fewer buyers and sellers, and because of this, OTC investing carries more risk. There are a number of reasons why a company’s stock might be unlisted. A company must meet exchange requirements for its stock to be traded on an exchange. A number of companies are traded as OTC equities because they’re unable to meet exchange listing requirements, such as the threshold for the number of publicly traded shares or the minimum price per share. Over-the-counter markets are those where stocks that aren’t listed on major exchanges such as the New York Stock Exchange or the Nasdaq can be traded.

With less transparency and oversight, OTC companies require extensive research. Analyze the company’s business model, leadership team, financials, industry outlook, and risks to determine if the stock price seems reasonably valued before buying in. You need to understand, as thoroughly as possible, what is driving the company’s stock price. Our InvestingPro platform provides investors a way to screen and analyze securities across all tiers of the OTC markets. It’s important to keep current on any regulatory changes and compliance requirements when it comes to your stocks. This can be difficult for those new to OTC stocks, so it can be helpful to work with a financial professional or to seek the advice of investors who have experience with OTC stocks.

The Financial Industry Regulatory Authority regulates broker-dealers that engage in OTC trading. These are all reasons why a company’s stock might trade on the OTC markets. Before we move on, it’s important to mention that there are some big differences between the OTC markets and the major exchanges like the NYSE and Nasdaq.

The US and foreign businesses in this medium tier are called the Venture Market and are in the entrepreneurial and development stages. Accordingly, OTCQB companies are subject to oversight and must disclose their financial information. “Off-exchange trading” accounted for around 16 percent of all stock transactions in the United States in 2008; by April 2014, that percentage had risen to about 40 percent.

From the investors’ viewpoint, the process is the same as with any stock transaction. As usual, they can place limit or stop orders in order to implement price limits. Many companies that trade over the counter are seen as having great potential because they are developing a new product or technology, or conducting promising research and development. OTC Markets Group, the largest electronic marketplace for OTC securities, groups securities by tier based on the quality and quantity of information the companies report. Before looking at the bond market, let’s consider how stocks commonly trade.

OTC markets are sometimes cast as the seedy underbelly of the stock market. If the major exchanges are a mall, the OTC markets are a foreign bazaar. To trade securities on OTC markets, companies must meet certain requirements to qualify for one of three market tiers with varying levels of disclosure and reporting standards. Competing broker-dealers, known as market makers, display the price at which they are willing to buy and sell a security. By posting bid and ask prices, market makers provide liquidity to the OTC markets.

Because OTC stocks are less liquid than many other assets due to their low trading volume, any money allocated to them should not be money you may need in the near term. And because OTC stocks represent a higher risk than some other types of assets, any money spent on them should be your “gambling” money, your high-risk money that you can afford to lose. TradeStation is an online securities trading firm founded in 1982. TradeStation offers a service called TS Select for trading OTC stocks commission-free and is available via their web platform or mobile app.