Over-the-counter (OTC) trading involves trading securities outside of a major exchange. OTC trading usually occurs through a broker-dealer network, rather than in a single, consolidated exchange like the NYSE or Nasdaq.
A range of securities and instruments only trade OTC though. For instance, companies which do not meet requirements to be traded on a major stock exchange, including the shares of some major international companies, are often traded OTC instead. In addition, some types of securities, like corporate bonds, are generally traded OTC.
Over-the-counter (OTC) trading occurs directly between two parties and can be centered around a broker-dealer that facilitates a transaction. OTC markets are almost always electronic, meaning that buyers and sellers don’t interact in person on a trading floor.
Trades on an OTC market may go through a dealer, who works as a market maker and sets the price at which they’ll buy or sell a security.
There are a number of reasons why a security might be traded OTC rather than on an exchange, including the size of the company and the country where it is based. If a company is too small to meet the requirements for an exchange, or otherwise can’t be traded on a standard market exchange, they might opt to sell its securities OTC.
Did you know
You automatically get access to 300+ OTC stocks
Types of OTC Securities
Certain types of securities are frequently traded OTC, rather than through a formal exchange. Here are a few of the most common OTC securities.
ADRs
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.
Bonds
Bonds, including bonds bundled into ETFs, are not usually traded on centralized exchanges. Instead, most are exchanged OTC on the secondary market via broker-dealers.
Small Company Stocks
Smaller or newer companies often can’t afford the fees charged by major exchanges, so they trade OTC instead. These stocks are known as “unlisted stocks.”
Did you know
The New York Stock Exchange charges $295,000 to list on its exchange, while the Nasdaq charges up to $75,000.
Derivatives
Derivatives are contracts whose value is tied to an underlying asset. The underlying asset may be anything from commodities to bonds to interest rates. These financial instruments are set up by a broker and traded OTC.
Cryptocurrencies
Cryptocurrencies are not traded on the stock market, and are often exchanged directly between sellers and buyers using electronic OTC trades.
The primary advantage of OTC trading is the wide range of securities available on the OTC market. Several types of securities are available to investors solely or primarily through OTC trading.
These include:
Foreign companies: You can buy ADRs on OTC markets that give you access to foreign companies, which otherwise couldn’t list in the US.
OTC-only securities: Some securities, like derivatives and many bonds, are only traded on OTC markets.
New and smaller companies: Companies that can’t afford to list on exchanges often sell their stock on OTC markets, giving you access to even more options. They sometimes are later listed on a major stock exchange, which is called “uplisting.”
Risks of OTC Trading
OTC investing carries a higher amount of risk than exchange-traded stocks due to lower liquidity and higher volatility in the market. OTC markets are less regulated than exchanges and have more lax reporting requirements. That’s why it’s always important to research OTC stocks as you would any other investment in order to understand the risks involved with investing.
Here are a few of the risks associated with OTC trading:
Low transparency: OTC-traded companies are not required to provide the same amount and quality of information to the public. This allows a wide range of companies to trade OTC, but it also means that investors have less information about the securities they trade OTC.
Lax Regulation: There are fewer regulations on OTC-traded companies compared to exchange-traded ones, although some OTC networks are still SEC-regulated.
Low liquidity: A lower trade volume than exchanges can decrease trade liquidity. This is because low volume can result in wide bid-ask spreads and longer timelines for finalizing trades.
Higher volatility: Low-cost “penny stocks” often sold on the OTC market, are a high-risk investment. This is partially because they tend to be shares in newer, less-stable companies.
Types of OTC Markets
There are several well-known networks for OTC trading, which are distinct in terms of the securities they offer investors.
OTCQX
Also called the “Best Market,” this market has the most stringent regulations of the OTC markets, with a high amount of SEC (Securities and Exchange Commission) oversight. It consists largely of stock in foreign companies or in newer, still-growing companies. It does not offer the following:
Stock in shell companies
Stock in companies undergoing bankruptcy
Penny stocks (stocks that sell for under $5)
OTCQB
Known as the “venture market,” this market entails a moderate amount of oversight, and it shares some information with the SEC. It consists largely of companies undergoing development.
Pink Sheets
This is the riskiest type of OTC market. It does not require any SEC regulation or financial reporting, and includes a high number of shell companies.
How to Buy OTC Stocks
If you’re curious about OTC trading, Public offers over 300 OTC stocks that you can invest in using our online investment platform. Investors can trade OTC on Public with the same available funds they would use for any other trade, and users with funded accounts automatically have access to OTC trading.
Buying OTC Stocks on Public
It’s easy to buy OTC stocks on Public. Here’s how you do it:
Ensure you have enough money in your brokerage account and search for the company’s ticker symbol on Public.
Enter a whole number of shares and purchase the security during normal trading hours. Public doesn’t usually allow after-hours OTC trading or fractional investments.
Public-facilitated OTC trades default to limit order—that is, securities are automatically sold at a specified price or lower—though they can be adjusted to market order.
Note: Most trades will settle within two business days of when they are purchased.
Over-the-counter trading can be a useful way to invest in foreign companies with US dollars, or other securities that aren’t listed on the major exchanges. When you trade over-the-counter, you can also get access to larger companies like Tencent, Nintendo, Volkswagen, Nestle, and Softbank that aren’t listed on major U.S. exchanges. But OTC trading does come with a few risks, including lower regulatory oversight than market exchange trading and higher volatility.
OTC trading can open new avenues for investors looking to expand their portfolios and understanding the specifics of the OTC market is a critical part of making informed investment decisions. As always, consult a financial advisor if you have questions about your particular situation.
OTC, or over-the-counter, stocks are securities traded through a decentralized broker-dealer network rather than a major stock exchange.
How to buy OTC stocks?
Customers usually can buy 300+ OTC stocks by making an account with a broker like Public. With Public, you can now also buy and sell stocks, ETFs, Treasuries, crypto, and alternative assets in one place
What is OTC trading agreement?
In an OTC contract, two parties, or their representative brokers and bankers, set the terms for how a given trade will be dealt with in the future.
How do you trade on OTC?
The process for OTC trading looks similar to that for other stocks, and you can buy and sell OTC through many online brokers, including Public. You’ll need sufficient funds in your brokerage account to complete the purchase, and will need to know the given company’s ticker symbol.
What time does OTC market open?
OTC stock markets are open from Monday to Friday, 9:30 am-4:00 pm EST. Markets may be closed on national holidays.
Are OTC markets regulated?
OTC securities are traded through a broker-dealer network, rather than on a major centralized exchange. They are subject to some degree of SEC regulation and eligibility requirements.
