OTC Markets: What It Is, How to Trade It, & Pros and Cons

This means two counterparties (a buyer and a seller) conduct their transactions through a brokerage and, therefore, outside of an exchange. OTC securities present a number of additional risks, compared to securities that trade on a national exchange. The stakes are high, but the potential for tremendous gains is there. Those are systems through which broker-dealers post price and volume. Only broker-dealers qualified with FINRA are allowed to apply to quote securities. At that time, you could buy shares from your buddy in a coffee shop or a bar.

• There are four groups — OTC Best Market (OTCQX), the OTC Bulletin Board (OTCQB), the pink sheets (OTCPK), and the grey sheets (GREY).
• StocksToTrade in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites.
• And while the broker-dealers trade from their own brokerage accounts, they provide extensive liquidity by trading.
• If the company is still solvent, those shares need to trade somewhere.
• Volatility also tends to be higher, resulting in larger price swings.
• Even though OTC securities are not listed with the major exchanges, companies can still sell their stocks to the public over the counter.

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While some OTC securities report to the Securities and Exchange Commission (SEC), others may follow a different reporting standard or may not file reports to any regulatory body. StocksToTrade in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, StocksToTrade accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

However, they are still mainly considered to be speculative penny stocks. To be able to trade in the OTC market, a company must be sponsored by a market maker. The market maker will sponsor the issue as market makers are the only ones allowed to apply to have a quote listed. As of March 7, 2022, the dollar volume is $219 million and the share volume is $1.4 billion. The OTC Pink is the largest tier in terms of the number of companies listed within it.

There are four groups — OTC Best Market (OTCQX), the OTC Bulletin Board (OTCQB), the pink sheets (OTCPK), and the grey sheets (GREY). Gordon Scott has been an active investor and technical analyst or 20+ years. Assess the sustainability and scalability of their business model. 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. The SEC can suspend trading in a security if there are questions about accuracy of information or manipulative trading.

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. There are benefits of OTC securities, but consider the risks involved, and decide whether they align with your financial goals. OTC markets provide opportunities for bigger moves, but because of reduced regulation, the reverse could also happen, Soscia says.

Liquidity is often lower as well, meaning it may be difficult to buy or sell shares when desired. Volatility also tends to be higher, resulting in larger price swings. OTC markets are safe to trade but there are some risks with the process, such as less information available about the securities and less liquidity. Picking companies in the tiers that have stronger financial standards can help reduce the risks in OTC trading.

OTC Markets Group Inc. provides services in three core areas that are essential for better-informed and more efficient financial markets. The fields are trading services, market data, and corporate services. Companies on the OTC Pink marketplace are often penny stocks, shell companies, and companies that are in financial distress. So, it’s important to understand how OTC markets work, what the different OTC market tiers are, and what the classifications that are given to OTC stocks mean. Over-the-counter derivatives are private financial contracts established between two or more counterparties. Moreover, on OTC Markets, it is possible to find investment products that are not presented on securities exchanges (e.g., bonds, derivatives, cryptocurrencies, etc.).

Whatever the case, the company could sell its stock on the over-the-counter market instead, and it would be selling “unlisted stock” or OTC securities. Basically, it’s selling stock that isn’t listed on a major security exchange. Less transparency and regulation means that the OTC market can be riskier for investors, and sometimes subject to fraud. What’s more, the quoted prices may not be as readily available—with less liquidity, these stocks are prone to big swings in prices. For new investors, the risks likely outweigh the rewards of investing in OTC stocks.

Certain OTC markets might have limited liquidity and come with a significantly low trading volume. Therefore, it becomes quite difficult for traders to purchase or sell positions at their desirable prices. However, you should note that OTC markets also have potential benefits. Some of the most commendable ones include lower transaction costs and greater flexibility.

The filing requirements between listing platforms vary and business financials may be hard to locate. Although exchange-listed stocks can be traded OTC on the third market, it is rarely the case. Usually OTC stocks are not listed nor traded on exchanges, and vice versa. You now have a solid overview of OTC markets and how they differ from major exchanges. While OTC markets come with additional risks, especially around lack of transparency and light regulation, they also provide opportunities for investors to get in early on companies with high growth potential. Disclosure and reporting requirements are more lax, so there is more uncertainty about the companies’ financials and operations.

This could be expansion into new markets, product launches, mergers or acquisitions. Growth catalysts show the company’s potential and may indicate a buying opportunity. Investors should evaluate companies based on the specific market tier and designation to determine if an OTC stock meets their investment objectives regarding transparency, liquidity, and risk. To qualify for this tier, companies must meet higher financial standards, be current in their reporting, and undergo an annual qualification review. The OTCQX is the premier marketplace for established, investor-focused U.S. and global companies. OTC companies have more relaxed reporting standards, so perform due diligence to understand the company and any risks before investing.

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 Over-the-counter Finance based on the frequency of financial disclosures. The tiers give no indication of the investment merits of the company and should not be construed as a recommendation. Most common stocks with real potential are priced over $15 per share and are listed on the NYSE or Nasdaq.

OTC Markets Group, the largest electronic marketplace for OTC securities, groups securities by tier based on the quality and quantity of information the companies report. 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. The over-the-counter (OTC) markets have been facilitating trading of financial instruments for decades.