But OTC markets offer the ability for large and small – indeed, tiny – stocks and other securities to be listed with different requirements and, in some cases, no requirements at all. Because they trade like most other stocks, you can buy and sell OTC stocks through most major online brokers. The electronics giant has a market cap of more than $250 billion (USD equivalent) and trades primarily on the Korea Exchange. So, unless you have a brokerage account that allows you to buy stock on foreign markets, you’ll have to buy the OTC version. Yes, OTC markets are perfectly legal and are a vital part of the global financial system. They operate with less formal regulation compared to public exchanges.

The Over-The-Counter (OTC) markets comprise a variety of key players that facilitate trading and ensure proper oversight. 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. All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount. This creates a network of brokers that can offer securities to retail customers (aka you) via the OTC Markets Group Inc. Bonus forex platform. OTC trading is for large, institutional-level trades, typically handled by a professional dealer.

OTC securities, meanwhile, often have very low liquidity, which means just a few trades can change their prices fast, leading to significant volatility. This has made the OTC markets a breeding ground for pump-and-dump schemes and other frauds that have long kept the enforcement division of the U.S. Stocks traded OTC are often those that are unable to meet exchange listing standards, instead traded on OTC markets such as those provided by the OTC Market Group. Examples of these platforms in the US include OTCQX, OTCQB and the Pink Open Market, each with varying degrees of regulation and transparency. OTC or over-the-counter trading is the process of exchanging financial instruments outside of a central exchange, directly between two parties. OTC trading can be conducted across a wide range of products, including stocks, bonds, derivatives and currencies.

OTC markets do present additional risks to investors compared to major exchanges. Securities on OTC markets tend to be more volatile and thinly traded. It may also be more difficult to buy and sell securities, and bid-ask spreads are often wider. Since regulations for OTC markets are less stringent than major exchanges, companies have more flexibility in areas like reporting requirements, share pricing, and corporate governance.

Equities (OTC Stocks)

Our partners cannot pay us to guarantee favorable reviews of their products or services. At LiquidityFinder, we work to match you with the best liquidity provider possible. Lower trading volumes on OTC markets can generate liquidity problems, especially with larger transactions. Oversold or undervalued conditions signal a good time to buy, while overbought conditions indicate it may be time to sell. Use limit orders for OTC stocks since they often experience large spreads between the bid and ask price. Review the income statement, balance sheet, and cash flow statement.

OTC Market Key Characteristics

On the other hand, many OTC stocks are issued by highly speculative businesses or even outright fraudulent companies involved in pump-and-dump scams. A few types of securities that trade on the OTC markets can potentially make good investments. 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 U.S., over-the-counter trading is now conducted on separate exchanges. These trades are done on the OTC market to avoid causing a big price swing on a public exchange. The inherent opacity of OTC markets is a major focus for regulators.

OTC Markets Group

This process is popular among companies that aren’t compatible with the strict criteria of established exchanges such as the New York Stock Exchange or Nasdaq. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.

• Because of this, they’re traded via broker-dealer networks, which means they are OTC securities.
• Usually, a trader has the OTC security, then it goes to a broker-dealer, and then the broker-dealer trades it to the person who’s buying it.
• Placing an OTC order is similar to placing one on a regular exchange.

OTC markets may also offer more flexibility in trading than traditional exchanges. Transactions can, in some cases, be customized to meet the specific needs of the parties involved, such as the size of the trade or the settlement terms. This flexibility can be particularly worthwhile for institutional investors or those trading large blocks of securities. Since the exchanges take in much of the legitimate investment capital, stocks listed on them have far greater liquidity.

The OTC Markets Group operates regulated markets for trading over 12,000 U.S. and international securities that are not listed on indices and exchanges like the Dow Jones or Nasdaq. OTC companies have more relaxed reporting standards, so perform due diligence to understand the company and any risks before investing. Review recent filings, press releases, and financial statements on the OTC Markets website or the company’s investor relations page. OTC markets provide an important avenue for investors looking to trade the stocks of small companies. Bonds aren’t traded on formal exchanges because they’re issued by banks.

Step 3: Execution

Here’s a rundown of how the over-the-counter stock markets work and the types of securities you might find on the OTC markets. We’ll also discuss some other key information you should know before you decide whether OTC stocks are right for you. Success requires diligence, legal structure, and careful risk management.

Stocks Mentioned

• In 1971, the National Association of Securities Dealers (NASD) launched a system to electronically trade OTC stocks.
• OTC trading is safe, but it’s also true that varying degrees of regulatory oversight means certain securities could be riskier to trade than others.
• OTC markets trade a variety of securities that may not meet the listing criteria of major exchanges, including penny stocks, foreign securities, bonds, derivatives, and cryptocurrencies.
• However, you can also find more established foreign companies and even some large U.S. companies trading OTC.

On the positive side, OTC markets offer opportunities for higher returns since the companies listed on these exchanges are often smaller, high-growth companies. The OTCQB and OTCQX markets have less stringent listing requirements than major exchanges, so companies at an earlier point of growth can list their shares. For investors, this means getting in on the ground floor of potential high-growth stocks.

The benefit of this is that smaller companies that aren’t big enough to get on formal exchanges can be trading in the OTC market. You can also trade stocks in large companies over-the-counter, but a defining feature of this market is that the rules regarding what can or can’t be listed are different. For these types of instruments, OTC dealers effectively create a market.

Interdealer Brokers

To trade securities on OTC markets, companies must meet certain requirements to qualify for one of three market tiers with varying levels of disclosure and reporting standards. To buy and sell securities on OTC Markets, you will need to open an account with a broker that provides access to these exchanges. Many reputable mainstream brokers offer OTC trading, and you can find the best OTC broker for your needs right here on the investing.com website. The open market consists of companies that don’t have any reporting requirements and aren’t subject to regulatory oversight. When you trade over-the-counter, you’re buying and selling via the telephone or, more likely, an electronic broker, i.e. a trading site.

Separating the wheat from the chaff can be challenging, and given the lighter regulations in place, present risk as well as opportunity. “The top tier of the OTC market is pretty safe and chances are pretty good. The requirements are there’s enough known about a company that is probably not too risky,” he says.

Instead, trades are negotiated and executed privately between two counterparties. While headlines often focus on the staggering $7.5 trillion daily volume of the global foreign exchange market, few realize that the bulk of this activity doesn’t happen on public exchanges like the NYSE. Imagine you’re a hedge fund looking to buy 100,000 shares of Apple (AAPL). To avoid showing your hand to other traders and investors, you might conduct the transactions in an over-the-counter (OTC) market, which offers anonymity. Major markets are open 24 hours a day, five days a week, and a majority of the trading occurs in financial centers like Frankfurt, Hong Kong, London, New York, Paris, Sydney, Tokyo, and Zurich. This means the forex market begins in Tokyo and Hong Kong when U.S. trading ends.