Trading on the Over-the-Counter (OTC) Market

Updated: April 16, 2020, 2:57 p.m.

Over-the-counter markets are where stocks that aren't listed on major exchanges such as the NYSE or Nasdaq can be traded. More than 10,000 stocks trade over the counter, and the companies that issue these stocks choose to trade this way for a variety of reasons.

With that in mind, here's a rundown of how the over-the-counter stock market works, the types of securities you might find on the OTC market, and the other key information you should know before you decide if OTC stocks are right for you.

What is the over-the-counter (OTC) market?

Historically, the phrase trading over the counter referred to securities changing hands between two parties without the involvement of a stock exchange. However, in the United States, over-the-counter trading is now conducted on separate exchanges.

OTC Markets Group (OTC:OTCM) is the name of one company that operates a public market for securities that, for one reason or another, don't trade on major stock exchanges like the NYSE and Nasdaq. It also provides a real-time quotation service to market participants, known as OTC Link.

The term OTC markets refers to the stock exchanges that list more than 10,000 over-the-counter securities, and while they are often thought of as one big financial market, there are actually three separate stock exchanges that list over-the-counter stocks:

  • OTCQX: This is the most selective of the three, and only 4% of all OTC stocks listed are traded on this exchange. It has the highest reporting standards and strictest oversight, and generally consists of foreign companies that list on major exchanges abroad, as well as some U.S. companies that plan to eventually list on the NYSE or Nasdaq.
  • OCTQB: The middle tier, the OTCQB is often called the "venture market," with a large concentration of developing companies. OTCQB companies have to report their financials and submit to some oversight.
  • Pink Sheets: Companies traded on the Pink Sheets have no reporting requirements and don't have to register with the SEC. While there are some legitimate companies on the Pink Sheets, this is where you'll find many shell companies and other companies with no actual business operations. Most stocks that fit the definition of penny stocks can be found on the Pink Sheets. (Note: In the book/movie The Wolf of Wall Street, which was based on true events, most of the stock scams were conducted with Pink Sheets securities.)

Other Major Exchanges

Examples of over-the-counter securities

A few types of securities that trade on the OTC markets can potentially make good investments.

For example, you'll often find international stocks (including many of large companies) on the OTC market. Nestle (OTC:NSRGY) is one good example. The food and drink conglomerate is based in Switzerland and primarily trades on the SIX Swiss Exchange, but also lists its shares on the Euronext as well as the OTC market in order to allow investors without easy access to the Swiss stock exchange to buy shares.

You'll also find stocks on the OTC markets that cannot list on the NYSE or NASDAQ for legal or regulatory reasons. For example, companies that operate cannabis-related businesses often have to list on the OTC markets because marijuana is still illegal on the federal level. As one example, Planet 13 Holdings (OTC:PLNH.F), which operates the world's largest cannabis dispensary and is based in Nevada, is an OTC stock. It trades on the top-level OTCQX exchange.

Finally, many stocks list on the OTC markets simply because they're too small or too thinly traded to meet the standards of larger exchanges. Many of these companies plan to list on either the NYSE or NASDAQ as they grow. For example, Walmart (NYSE:WMT) was an OTC stock from 1970 to 1972, when the company was still a relatively small retail chain.

How to buy OTC stocks

The process of buying OTC stocks is relatively easy. Because they trade just like most other stocks, you can buy and sell OTC stocks through most major online brokers. In order to buy shares of an OTC stock, you'll need to know the company's ticker symbol and have enough money in your brokerage account to buy the desired number of shares.

Looking to invest on OTC Markets or other exchanges?
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The bottom line on OTC stocks

It's easy to buy OTC stocks, but the tougher question to answer is whether you should buy OTC stocks. As we've seen, some types of stocks trade on the OTC markets for very good reasons, and they could make excellent investment opportunities. On the other hand, many OTC stocks are of highly speculative businesses, or even outright fraudulent companies involved in pump-and-dump scams.

As long as you understand the OTC marketplace and do your research on the stocks that interest you, you can help yourself avoid scams and other bad investments on the OTC and focus on finding solid long-term investments.

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