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

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


A financial exchange is a regulated, standardised market and could therefore be considered safer. The over-the-counter market is a network of companies that serve as a market maker for certain inexpensive and low-traded stocks, such as UK penny stocks. Stocks that trade on an exchange are called listed stocks, whereas stocks that are traded over the counter are referred to as unlisted stocks. The OTCQB Venture Market also offers clear information about early-stage or growth international and U.S. companies that do not yet meet the requirements of the OTCQX. To be listed on the OTCQB, companies should provide annual reports and undergo annual verification; their stocks should be sold at a minimum $0.01 bid, and the company may not be in bankruptcy.

Additionally, the over-the-counter market can also include other types of securities. The Financial Industry Regulatory Authority regulates broker-dealers that engage in OTC trading. If you’re considering investing in OTC securities, it’s important that you do your research and fully understand the risks you’re taking on. The OTC market can be highly volatile, and the limited requirements for companies to list on the OTC market result in greater risk for investors.

You’ll need sufficient funds in your brokerage account to complete the purchase, and will need to know the given company’s ticker symbol. Investors using OTC trading can buy stock in foreign companies by purchasing American Depository Receipts (ADRs). These are bank-issued certificates representing shares in a foreign company. An American financial institution can purchase shares in the company on a foreign exchange, and then sell ADRs to U.S. investors. OTC exchanges are also known for the wide range of securities they’re willing to list. More specifically, prospective investors can buy from a collection of penny stocks, bonds and derivatives that would otherwise be largely unattainable.

otc trading meaning

To learn more, see our Public’s Fee Schedule, Order Flow Rebate FAQ, and Order Flow Rebate Program Terms & Conditions. Oversold or undervalued conditions signal a good time to buy, while overbought conditions indicate it may be time to sell. Use limit orders What Is Otc Trading for OTC stocks since they often experience large spreads between the bid and ask price. With volatility and uncertainty, OTC markets may not suit all investment styles but have the potential to deliver outsized rewards to those who do their homework.

These companies must have audited financials and meet a minimum bid price of $0.01. They must also be up-to-date on current regulatory reporting requirements, and not be in bankruptcy. Again, this will largely depend on the platform being used, but many — but not all — exchanges or platforms allow investors to trade OTC stocks.

otc trading meaning

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. The tiers give no indication of the investment merits of the company and should not be construed as a recommendation. The middle tier is designed for companies that are still in the early to middle stages of growth and development.

OTC trades have greater flexibility when compared to their more regulated and standardised exchange-based counterparts. This means that you can create agreements that are specific to your trading goals. Stocks and other financial instruments can also be traded OTC – this includes derivatives such as swaps and forward contracts. The most popular OTC market is forex, where currencies are bought and sold via a network of banks, instead of on exchanges. This means that forex trading is decentralised and can take place 24 hours a day, rather than being tied to an exchange’s open and close times.

Frederick explains how these tiers work and the level of risk at each. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Once the position has moved a certain amount of points against the trader, a stop-loss order will automatically close the position. Likewise, when a position moves a specific number of points in the trader’s favor, a limit will automatically close the position. They are safe and effective when used according to the instructions on the label and those given by your healthcare provider.

Public Investing is a wholly-owned subsidiary of Public Holdings, Inc. (“Public Holdings”). This is not an offer, solicitation of an offer, or advice to buy or sell securities or open a brokerage account in any jurisdiction where Public Investing is not registered. Securities products offered by Public Investing are not FDIC insured.

otc trading meaning

You should review the relevant offering circular and any related supplements before making a decision with respect to the purchase or sale of any security. 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.

  • An over-the-counter (OTC) market refers to a decentralized market where participants trade securities directly between each other, rather than through an exchange.
  • You assume full responsibility for any trading decisions you make based upon the market data provided, and Public is not liable for any loss caused directly or indirectly by your use of such information.
  • When you trade over-the-counter, you can also get access to larger companies like Tencent, Nintendo, Volkswagen, Nestle, and Softbank that arent listed on major U.S. exchanges.

However, the goods traded on exchanges must adhere to strict standards and regulations. The financial and other information contained in this news release is not incorporated by reference into, or a part of, any offering documents or any security. All information regarding or relating to Freddie Mac securities is qualified in its entirety by the relevant offering circular and any related supplements.

Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues.

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. Our InvestingPro platform provides investors a way to screen and analyze securities across all tiers of the OTC markets. OTC markets typically have lower trading volume, which results in greater volatility and wider bid-ask spreads.

otc trading meaning

A decentralised market is simply a market structure consisting of various technical devices. This structure allows investors to create a marketplace without a central location. The opposite of OTC trading is exchange trading, which takes place via a centralised exchange. The open market consists of companies that don’t have any reporting requirements and aren’t subject to regulatory oversight. Transactions aren’t carried out directly on an exchange, nor are they directly overseen by the exchange. You access a broker’s services by telephone or electronically, i.e. over the internet via an online trading platform.

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