What Are OTC Stocks? Over-the-Counter Markets Explained

All such information is provided solely for convenience purposes only and all users thereof https://www.xcritical.com/ should be guided accordingly. Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. 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. 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.

What types of instruments are traded in the OTC market?

Since OTC stocks trade outside of traditional exchanges like the NYSE or Nasdaq, the OTC market gives you access to different types of securities, including penny stocks, international stocks, derivatives, corporate bonds, and even cryptocurrency. Over-the-counter, or OTC, markets are decentralized financial markets where two parties trade financial instruments using a broker-dealer. When a company is unlisted, it is public and can sell stocks, just not on a security exchange such as Nasdaq or the New York Stock Exchange. otc markets Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. 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.

Would you prefer to work with a financial professional remotely or in-person?

Because OTC stocks have less liquidity than those that are listed on exchanges, along with a lower trading volume and bigger spreads between the bid price and ask price, they are subject to more volatility. Usually, a trader has the OTC security, then it goes to a broker-dealer, and then the broker-dealer trades it to the person who’s buying it. The security’s price isn’t listed publicly as it would be on an exchange regulated by the Securities and Exchange Commission, says Proof of personhood Brianne Soscia, a CFP from Wealth Consulting Group based in Las Vegas.

What is your current financial priority?

Then last month the SEC approved the application of 24X National Exchange, a startup backed by Steve Cohen’s Point72 Ventures, to operate a 23/5 stock exchange. By leveraging the offering, broker-dealers can offer investors in the Asia-Pacific region expanded trading capabilities during their regular trading hours. The Grey Market is an unofficial market for securities that do not meet the requirements of other tiers. Usually, there is no or little information about the business itself, or financial reports. Securities traded on the Grey Market are the ones that are removed from official trading on securities exchanges or have not started it yet. Stocks and bonds that trade on the OTC market are typically from smaller companies that don’t meet the requirements to be listed on a major exchange.

Why You Can Trust Finance Strategists

Another market maker, Global Trading Solutions, offers to sell a smaller block of 10,000 shares at $0.90 per share. OTC markets offer access to emerging companies that may not meet the listing requirements of major exchanges. These smaller, growing companies can sometimes provide investors with the potential for higher returns, although this comes with higher risk. While OTC markets offer greater flexibility and fewer barriers to entry than traditional exchanges, they also come with exceptional risks and challenges.

However, when the promised sale doesn’t close, you discover that the promoter, Michael Glaspie, 72, of Florida, has transferred investor funds to other accounts—he’d been buying cryptocurrency, among other things—despite his assurances he wouldn’t. Glaspie pleaded guilty in 2023 to defrauding more than 10,000 victims of over $55 million through his « CoinDeal » investment scheme. After evaluating the quotes and considering the company’s prospects, MegaFund buys 30,000 shares from OTC Securities Group at $0.85 per share.

Now the firm is combining that calling card with its early-adopter status in overnight trading to give retail investors access to a spread of securities from across the geographic and market-capitalization spectrum. On the OTC, it is possible to find stocks, debt securities, and derivatives that usually are not traded over traditional stock exchanges. 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.

OTC markets offer a more convenient and cost-effective way to invest in foreign companies since trades are executed in U.S. dollars during U.S. trading hours, often with lower commissions than trading directly on foreign exchanges. Suppose you manage a company looking to raise capital but don’t meet the stringent requirements to list on a major stock exchange. Or you’re an investor seeking to trade more exotic securities not offered on the New York Stock Exchange (NYSE) or Nasdaq. Enter the over-the-counter (OTC) markets, where trading is done electronically. Companies may opt to trade shares in the over-the-counter market (meaning, they trade through a broker-dealer) if they’re unable to meet the listing requirements of a public exchange.

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. Not really, other than an exchange, brokerage, or platform perhaps not allowing users or investors to trade OTC stocks or securities. In that case, investors can look for another platform on which to execute trades that does allow OTC trading. The explosive retail interest that drove these moves also reinforced overnight trading’s promise in empowering investors to respond to market-moving events in real time outside normal trading hours.

Lastly, market risk, stemming from broad market fluctuations, affects the OTC market just like any other financial market. The Financial Industry Regulatory Authority (FINRA) oversees the OTC market in the U.S., maintaining transaction transparency and fairness. Notably, Penny Stocks, shell companies, and businesses in bankruptcy are never traded on the OTCQX.

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. Penny stocks and other OTC securities are readily available for trading with many of the online brokerages, these trades may be subject to higher fees or some restrictions. For example, some brokers may limit trading of OTC securities during the period surrounding the stock market open and close or require investors to place limit orders—which dictate an exact price for the trade to be executed—in lieu of market orders. As with any investment decision, it’s important to fully consider the pros and cons of investing in unlisted securities.

• Additionally, the over-the-counter market can also include other types of securities.
• 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.
• OTC Markets Group operates the OTCQX Best Market, the OTCQB Venture Market, and the Pink Open Market.
• OTC securities can trade via alternative trading systems such as the OTC Markets Group, a tiered electronic system used by broker-dealers to publish prices for OTC securities.
• Last month OTC Markets launched MOON ATS, an overnight trading platform that lets investors trade NMS securities listed on major exchanges from 8 PM to 4 AM Eastern Time, Sunday to Thursday.
• The Over-The-Counter (OTC) Market refers to a decentralized marketplace where financial instruments, such as stocks, bonds, derivatives, and commodities, are traded directly between two parties without the oversight of a centralized exchange.

You come across an opportunity called « CoinDeal, » which promises exceptionally high returns on the premise that one or more technology companies under the « ViRSE » banner are about to be acquired by a group of wealthy investors. You look to be in early on what promises like a big deal, just like other storied early investors. While OTC derivatives offer the advantage of customization, they also carry a higher level of credit risk compared with exchange-traded derivatives.

Unlike the NYSE and Nasdaq, they don’t have a central physical location and use a network of broker-dealers that facilitates trades directly between investors. In contrast, the major exchanges have centralized locations and use matching technology to process trades immediately. 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. Since the exchanges take in much of the legitimate investment capital, stocks listed on them have far greater liquidity.