What is over-the-counter trading? An investor’s guide to OTC markets

SoFi does not guarantee or endorse the products, information or recommendations provided in any third party website. But OTC markets offer the ability for large and small – indeed, tiny – stocks and other securities to be listed with different requirements and, in some cases, no requirements at all. While the New York Stock Exchange (NYSE) and the Nasdaq get all the press, over the counter markets, or OTC markets, list more than 11,000 securities across the globe for investors to trade. The key is doing thorough research, understanding the risks, and only investing money you can afford to lose. If you maintain realistic expectations about the level of volatility, OTC markets could be an avenue for substantial gains. In 1971, the National Association of Securities Dealers (NASD) launched a system to electronically trade OTC stocks.

It wasn’t as easy to make sketchy deals with listed companies, though it still happened. Remember, they’re off-exchange markets run by broker-dealer networks. A High-Yield Cash Account is a secondary brokerage account with Public Investing. Funds in your High-Yield Cash Account are automatically deposited into partner banks (“Partner Banks”), where that cash earns interest and is eligible for FDIC insurance. Your Annual Percentage Yield is variable and may change at the discretion of the Partner Banks or Public Investing.

The OTC Markets Group operates regulated markets for trading over 12,000 U.S. and international securities that are not listed on indices and exchanges like the Dow Jones or Nasdaq. Our InvestingPro platform provides investors a way to screen and analyze securities across all tiers of the OTC markets. Swiss food and drink company Nestle (NSRGY -1.48%) is an example of a major company that trades OTC in the U.S.

Finally, OTC Markets include several types of trading instruments that vary depending on the companies presented and the requirements for listing on OTCQX, OTCBX, Pink Sheets Market. Companies presented on OTC Markets Group are distinguished into four tiers according to the available information. These tiers are created for the investors to provide data about businesses and the amount of published information. ​​The tiers also give no indication of the investment merits of the company and should not be construed as a recommendation. Most successful stocks, such as Microsoft (MSFT), Meta (META), formerly Facebook, and Tesla (TSLA), all first listed their shares on the NYSE or Nasdaq with prices above $10. If you go with a real-world full-service brokerage, you can buy and sell OTC stocks.

Investors should consider their investment objectives and risks carefully before investing in options. Refer to the Characteristics and Risks of Standardized Options before considering any options transaction. Supporting documentation for any claims, if applicable, will be furnished upon request. Tax considerations What Is Otc Trading with options transactions are unique and investors considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy. If youre curious about OTC trading, Public offers over 300 OTC stocks that you can invest in using our online investment platform.

The company transitioning from OTC to a major exchange must be approved for listing by the relevant exchange. A completed application is necessary, along with various financial statements. This can include complete statements of shares outstanding and capital resources.

You should consult your legal, tax, or financial advisors before making any financial decisions. This material is not intended as a recommendation, offer, or solicitation to purchase or sell securities, open a brokerage account, or engage in any investment strategy. All investments involve the risk of loss and the past performance of a security or a financial product does not guarantee future results or returns. A stock exchange — like NYSE or Nasdaq — is a regulated environment in which buyers and sellers can trade shares of publicly listed companies.

what does otc mean

In contrast, NYSE regulations limit a stock’s symbol to three letters. There’s usually a seller at a much higher price than the current action. Now, if you place a market buy order and you get routed to that broker-dealer — well, you might be the one taking that offer. You often see several minutes of movement in one direction before the price changes.

OTC Markets Group, a third party, has created three tiers based on the quality and quantity of publicly available information. These tiers are designed to give investors insights into the amount of information that companies make available. Securities can move from one tier into another based on the frequency of financial disclosures.

  • OTC stocks have less liquidity than their exchange-traded peers, low trading volume, larger spreads between the bid price and the ask price, and little publicly available information.
  • The OTC market also consists of shares of companies that do not wish to meet strict exchange requirements.
  • You often see several minutes of movement in one direction before the price changes.
  • The key is going in with realistic expectations about volatility and doing extensive research to find the hidden gems.
  • Investors should exercise caution when considering these very speculative securities.

Stocks priced below $5, which trade over-the-counter, may have murkier financial outlooks and are generally speculative and very risky. Others trading OTC were listed on an exchange for some years, only to be later delisted. A stock may be automatically delisted if its price falls below $1 per share. If the company is still solvent, those shares need to trade somewhere.

what does otc mean

That said, with the right broker, you can buy one like any other stock. It’s a holdover from a time when you could actually buy shares over the counter. There are four groups — OTC Best Market (OTCQX), the OTC Bulletin Board (OTCQB), the pink sheets (OTCPK), and the grey sheets (GREY). 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. Assess the sustainability and scalability of their business model. Also, analyze their competitive landscape to identify major competitors and see how they stack up.

Those are some of the key reasons that a company might file to list its stock over the counter. Today, the OTC Markets Group operates an electronic inter-dealer quotation system that facilitates trading of a wide range of domestic and international securities. Review the income statement, balance sheet, and cash flow statement.

OTC securities are traded through a broker-dealer network, rather than on a major centralized exchange. They are subject to some degree of SEC regulation and eligibility requirements. OTC trading can open new avenues for investors looking to expand their portfolios and understanding the specifics of the OTC market is a critical part of making informed investment decisions. As always, consult a financial advisor if you have questions about your particular situation. Moreover, on OTC Markets, it is possible to find investment products that are not presented on securities exchanges (e.g., bonds, derivatives, cryptocurrencies, etc.). Most common stocks with real potential are priced over $15 per share and are listed on the NYSE or Nasdaq.

what does otc mean

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. 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. OTC stocks tend to be more volatile, as they are often smaller companies.

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