Over-The-Counter – OTC

10-K Wrap

What is over the counter?

OTC refers to the process of trading securities for companies that are not listed on an official stock exchange such as the New York Stock Exchange (NYSE). Securities traded over the counter are traded through a network of brokers and not on a central exchange. These securities do not meet the conditions required to be listed on a standard stock market.

Commercial transactions take place via the Over the Counter bulletin board (OTCBB) or Pink Sheets listing services. The OTCBB is an electronic listing and trading service that facilitates higher liquidity and better information sharing. Pink Sheets is a private company that works with brokers to market small business stocks.


OTC trade

Over-the-counter explanation

The stocks that trade via OTC are generally smaller companies that cannot meet the formal trading listing requirements. However, many other types of securities are also traded here. Shares that trade on the stock exchange are called listed shares while stocks that trade via OTC are called unlisted shares.

OTC securities trading by brokers who trade directly with each other on computer networks and by telephone using the OTCBB. Brokers act as market makers using the Pink Sheets and the OTC Bulletin Board, provided by the National Association of Securities Dealers (NSAD).

Key points to remember

  • Over-the-counter (OTC) refers to the securities trading process for unlisted companies.
  • Securities traded over the counter are traded through a network of brokers rather than on a central exchange.
  • Over-the-counter trading helps promote stocks and financial instruments that would not otherwise be available to investors.
  • Companies holding over-the-counter shares can raise capital by selling shares.

Types of securities traded over the counter

The stocks that trade via OTC are not just small companies. Some large, well-known companies are listed on the OTC markets. For example, the OTTCQX trades shares in foreign companies such as Nestlé SA, Bayer A.G., Allianz SE, BASF SE, Roche Holding Ag and Danone SA.

American Certificates of Deposit (ADR), which represent equity units that trade in foreign currencies, are often traded over the counter. Shares are traded this way because the underlying company does not want or cannot meet the strict trading requirements. In addition, the cost of $ 500,000 to register on the NYSE – up to $ 75,000 on the Nasdaq – creates a barrier for many businesses.

Instruments such as bonds are not traded on an official exchange market, as banks issue these debt securities and market them via broker networks. They are also considered to be over-the-counter securities. Banks save the cost of listing fees by matching purchases and sales with internal clients or another brokerage firm. Other financial instruments, such as derivatives, are also traded through the network of dealers.

OTC networks

The OTC Markets group operates some of the best known networks, such as the cheapest (OTCQX), the venture capital market (OTCQB) and the Pink Open Market. Although OTC networks are not official exchanges like the NYSE, they still have eligibility requirements. For example, the OTTCQX does not list stocks that sell for less than five dollars – called penny stocks – for shell companies or bankrupt companies. The cheapest OTCQX includes securities of companies with the largest market capitalizations and greater liquidity than other markets.

Through OTC markets, you can find stocks of companies that are small and developing. Depending on the listing platform, these companies may also submit reports to regulators of the Securities and Exchange Commission (SEC). OTCBB shares will generally have a suffix “OB” and must file financial statements with the SEC.

Another trading platform is the Pink Sheets and these stocks are available in a wide variety. These companies do not meet the requirements of the SEC. Although buying shares of this nature may involve less transaction costs, they are preferred for price manipulation and fraud. These shares will generally have a “PK” suffix and are not required to file financial statements with the SEC.

Although the Nasdaq operates as a network of dealers, Nasdaq stocks are generally not classified as OTC because the Nasdaq is considered a stock exchange.

Advantages and disadvantages of the OTC market

As mentioned earlier, bonds, ADRs and derivatives are also traded on the OTC market. However, investors should be very careful when investing in more speculative OTC securities. Filing requirements between listing platforms vary and some necessary information such as corporate financial data can be difficult to locate.

Most financial advisers view over-the-counter trading as speculative. For this reason, investors should consider their tolerance for investment risk and whether over-the-counter stocks have a place in their portfolios. However, with the added risk of OTC stocks comes the possibility of significant returns. Since these stocks are trading at lower values ​​and generally at lower transaction costs, they offer the possibility of a stock price appreciation.

OTC stocks are generally not known for their large volume of transactions. A lower stock volume means that there may not be a ready buyer when the time comes to sell your shares. In addition, the difference between the bid and ask prices is generally greater. These stocks can make volatile movements in any market or economic data.

The OTC market is an alternative for small businesses or those who do not wish to list on standard exchanges. Listing on a standard stock exchange is an expensive and time-consuming process, and beyond the financial capabilities of many small businesses. Companies may also find that listing on the over-the-counter market provides quick access to capital through the sale of shares.


  • OTC provides access to securities not available on standard exchanges such as bonds, ADRs and derivatives.

  • Fewer OTC regulations allow the entry of many companies that cannot, or choose not to, list on other exchanges.

  • Through low-cost equity trading, speculative investors can earn significant returns.

The inconvenients

  • OTC stocks have less commercial liquidity due to the low volume, which leads to delays in the completion of trade and large bid-ask spreads.

  • Less regulation leads to less public information available, the possibility of obsolete information and the possibility of fraud.

  • Over-the-counter stocks are subject to volatile movements when economic and market data are published.

Real examples of OTC titles

OTC Markets Group is the operator of the financial markets for OTCQX. “OTCMarkets.com” lists the most actively traded companies, as well as information on advances and declines.

On a given day, the total volume of the dollar may exceed $ 1.2 billion with more than 6 billion shares traded. The companies include Chinese multimedia company Tencent Holdings LTD (TCEHY), food and beverage giant Nestlé SA (NSRGY) and healthcare company Bayer A.G. (BAYRY).

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