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By Selena Maranjian (TMF Selena)
July 12, 2002

Q. What are OTC stocks?

A. OTC officially stands for "over the counter," but "over the computer" is more appropriate today. Long ago, to buy or sell a stock that didn't trade on a stock exchange, you would call your broker. He would call another broker and make the trade over the phone -- not a terribly efficient system. Then, in 1971, the Nasdaq was established, offering an automated stock quotation and trading system. Suddenly, it was much easier to get a good price on your transaction, and trading activity could be monitored.

Stocks listed on exchanges (such as the New York Stock Exchange) are traded face to face at one location, in "trading pits." All others are OTC stocks, traded electronically via a network of dealers across the country. The Nasdaq market is the main OTC system in America, listing more than 5,000 companies. It encompasses a range of firms, from young, relatively unknown enterprises to behemoths such as Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC). Thousands of more-obscure OTC companies that don't meet Nasdaq's listing requirements trade separately, often with their prices listed only once daily, on "pink sheets" or the OTC Bulletin Board. Often, little information is available about these companies, and they're frequently penny stocks. (Penny stocks are usually best avoided, as they're frequently targets of fraud.)

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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.