Over-The-Counter - OTC

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What is 'Over-The-Counter - OTC'

Over-the-counter (OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.

BREAKING DOWN 'Over-The-Counter - OTC'

In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.

Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records.

Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the bank that makes the market in that bond and asks for quotes.

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RELATED FAQS
  1. How do I buy an over-the-counter stock?

    The process of purchasing over-the-counter (OTC) stocks is different than purchasing stock from companies on the NYSE and ... Read Answer >>
  2. How does a company move from an OTC market to a major exchange?

    The over-the-counter market is not an actual exchange like the NYSE or Nasdaq. Instead, it is a network of companies that ... Read Answer >>
  3. What are the steps to get a company listed on the OTCBB?

    The over-the-counter bulletin board (OTCBB) is a regulated quotation service for over-the-counter (OTC) securities. The securities ... Read Answer >>
  4. What are the risks involved in OTC (over-the-counter) trading?

    Learn about the significant disadvantages and risks that are involved for investors seeking to trade in over-the-counter ... Read Answer >>
  5. Can investors short sell pink sheet or over-the-counter stocks?

    Short selling is an effective trading strategy that can be employed to hedge the risk of a loss on an off-setting position ... Read Answer >>
  6. What is a "pink sheet" in the context of an OTC (over-the-counter) transaction?

    Read about pink sheets, the electronically driven over-the-counter market in which broker-dealers connect to trade the stock ... Read Answer >>
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