What Is the Over-the-Counter OTC Market?

For example, many hugely profitable global companies https://www.xcritical.com/ that are listed on foreign exchanges trade OTC in the U.S. to avoid the additional regulatory requirements of trading on a major U.S. stock exchange. Buying stocks through OTC markets can also provide the opportunity to invest in a promising early-stage company. Some companies may want to avoid the expense of listing through the NYSE or Nasdaq.

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OTC securities, meanwhile, often have very low liquidity, which means just a few trades can change their prices fast, leading to significant volatility. This has made the OTC markets a breeding ground for pump-and-dump schemes and other frauds that have long kept the enforcement division of the U.S. Less transparency and regulation means that the OTC market can be riskier for investors, and sometimes subject to fraud. What’s more, the over-the-counter securities market the quoted prices may not be as readily available—with less liquidity, these stocks are prone to big swings in prices. A third market has developed because of the increased importance of institutional investors, such as the mutual funds, who deal in large blocks of stock.

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A stock exchange — like NYSE or Nasdaq — is a regulated environment in which buyers and sellers can trade shares of publicly listed companies. In addition to the decentralized nature of the OTC market, a key difference is the amount of information that companies make available to investors. When stocks are listed on formal exchanges, investors can typically access a great deal more information on them, including reports written by Wall Street analysts, company news and filings, and real-time trading data. As a result, it is vital to emphasize that in order to reduce risks, the investor should find a reputable broker-dealer for negotiating the trades.

What Is an OTC Market? A Quick Definition

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. Below is a table distinguishing the differences between trading OTC and on a regulated exchange.

• In the late 1990s, Pink Sheets transitioned to an electronic quotation system, eventually becoming the OTC Markets Group, which operates the OTCQX, OTCQB, and OTC Pink platforms.
• This company runs the largest OTC trading marketplace and quote system in the country (the other main one is the OTC Bulletin Board, or OTCBB).
• Some companies may want to avoid the expense of listing through the NYSE or Nasdaq.
• Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website.
• Despite its decentralized nature, the OTC market is regulated by various bodies.
• OTC trading may also appeal to companies that were previously traded on an exchange but have since been delisted.
• Investors should exercise caution, especially with thinly traded penny stocks, as there is greater potential for fraud and manipulation.

“Because there’s less regulation, they’re known to be targets of market manipulation where prices can be manipulated. It involves a lot of risk because you’re buying typically less reputable securities. Let’s say a small company wants to sell its stock but doesn’t meet the prerequisites of an exchange, such as reaching a minimum share price or having a certain number of shareholders.

Lastly, market risk, stemming from broad market fluctuations, affects the OTC market just like any other financial market. Operational risk, including system failures or human errors, is also prevalent in the OTC market due to its reliance on the operational efficiency of individual participants. Trading in the OTC market is fundamentally different from exchange trading. It involves two parties dealing directly with each other without the intermediary of a centralized exchange. If you’re going with an online discount broker, check first to make sure it allows OTC trades. Interactive Brokers, TradeStation, and Zacks Trade are among those that do.

Glaspie pleaded guilty in 2023 to defrauding more than 10,000 victims of over $55 million through his “CoinDeal” investment scheme. OTC Markets Group operates the OTCQX Best Market, the OTCQB Venture Market, and the Pink Open Market. Although OTC networks are not formal exchanges such as the NYSE, they still have eligibility requirements determined by the SEC. Finally, because of the highly speculative and higher risk backdrop of investing in OTC securities, it’s important to invest only an amount of money that you are comfortable losing. The median home sale price in the United States today is $428,281, according to Redfin. While that’s a 3.9 percent decline year over year, it still prices out many Americans, especially first-time buyers, from participating in the housing market at all.

However, they are not foolproof and can be swayed by emotions, misinformation, or skewed by participants who are not representative of the broader electorate. For the self-directed investor willing to take on more risk in exchange for the possibility of higher rewards, OTC markets are worth considering as part of a diversified investment strategy. With the knowledge you’ve gained, you can determine if OTC markets are the right fit for your investment goals. Oversold or undervalued conditions signal a good time to buy, while overbought conditions indicate it may be time to sell. Use limit orders for OTC stocks since they often experience large spreads between the bid and ask price.

OTC markets trade a variety of securities that may not meet the listing criteria of major exchanges, including penny stocks, foreign securities, bonds, derivatives, and cryptocurrencies. The diversity of offerings attracts speculators but also demands thorough research. Over-the-counter stocks don’t trade on a regulated exchange such as the NYSE or the NASDAQ. In most cases, they’re trading OTC because they don’t meet the stringent listing requirements of the major stock exchanges. For foreign companies, cross-listing in OTC markets like the OTCQX can attract a broader base of U.S. investors, potentially increasing trading volume and narrowing bid-ask spreads. Some foreign companies trade OTC to avoid the stringent reporting and compliance requirements of listing on major U.S. exchanges.

The OTCQB Venture Market also offers clear information about early-stage or growth international and U.S. companies that do not yet meet the requirements of the OTCQX. To be listed on the OTCQB, companies should provide annual reports and undergo annual verification; their stocks should be sold at a minimum $0.01 bid, and the company may not be in bankruptcy. But perhaps the greater risk to OTC equity investors is that there are fewer disclosure requirements for many unlisted companies. A company that’s listed on a U.S. exchange must follow disclosure rules that require it to file regular reports and financial statements with the U.S. These materials, which are available to the public on the SEC’s EDGAR database, are helpful for investors seeking to gain a thorough understanding of a company’s performance and financial health. OTC trades in exchange-listed stocks—whether occurring on an ATS or otherwise—must be reported to a FINRA Trade Reporting Facility (TRF).

Within each tier, companies may be designated with additional tags to indicate their industry, location, or other attributes. For example, the OTCQB and OTCQX offer designations for fully reporting cannabis companies and SEC regulated banks, respectively. They help market participants get a deeper view of the market by connecting various market makers and providing information on the best available prices. While higher risk, OTC markets play an important role for investors looking to diversify into small caps and microcaps. With proper precautions taken, OTC markets can be a source of substantial rewards for enterprising investors. The key is going in with realistic expectations about volatility and doing extensive research to find the hidden gems.

Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. After evaluating the quotes and considering the company’s prospects, MegaFund buys 30,000 shares from OTC Securities Group at $0.85 per share. The trade is executed directly between MegaFund and OTC Securities Group through a private negotiation. No public announcement is made about the transaction, and the price isn’t displayed on any exchange.

Notably, Penny Stocks, shell companies, and businesses in bankruptcy are never traded on the OTCQX. Also, analyze their competitive landscape to identify major competitors and see how they stack up. An innovative business model in a growing industry with few major competitors is ideal. With volatility and uncertainty, OTC markets may not suit all investment styles but have the potential to deliver outsized rewards to those who do their homework. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

Legal and regulatory risks arising from non-compliance with regulations or the occurrence of fraudulent activities are also a significant concern in the OTC market. Liquidity risk arises due to the potential difficulty in finding a buyer or seller for a particular OTC instrument, which can lead to larger bid-ask spreads and potentially higher transaction costs. Globally, OTC markets are regulated by local financial authorities and international bodies like the International Organization of Securities Commissions (IOSCO). Liquidity and volatility also significantly influence the OTC market’s pricing dynamics.

In this guide, you’ll learn what OTC (Over-the-Counter) is and what are the types of OTC Markets, as well as the advantages and disadvantages of trading on this market. Transactions in OTC equities must be reported to the FINRA OTC Reporting Facility (ORF) for real-time public dissemination. Registered representatives can fulfill Continuing Education requirements, view their industry CRD record and perform other compliance tasks. FINRA Data provides non-commercial use of data, specifically the ability to save data views and create and manage a Bond Watchlist. The SEC can suspend trading in a security if there are questions about accuracy of information or manipulative trading.