What is an Unlisted Security?

An unlisted security is a financial instrument that is not traded on a formal exchange because it does not meet listing requirements. Trading of unlisted securities is done on the over-the-counter (OTC) market and they are often called OTC securities. Market makers, or dealers, facilitate the buying and selling of unlisted securities on the OTC market.

Understanding Unlisted Security

Unlisted securities are usually issued by smaller or new firms that cannot or do not wish to comply with the listing requirements, such as market capitalization thresholds or a willingness to pay the listing fees, of an official exchange. Furthermore, because they are not exchange traded, unlisted securities are often less liquid than listed securities. Unlisted stock can be tracked via pink sheets or on the OTCBB (OTC Bulletin Board).

Securities must meet a number of requirements to be listed on an exchange. For example, to be listed on an exchange such as the NYSE or AMEX, a publicly traded stock must represent a company that surpasses an annual income or market capitalization threshold. The company also must have issued a specific number of shares and be able to afford the exchange's listing fee, which often exceeds $100,000. These requirements ensure that only the highest quality companies trade on exchanges. Thus, unlisted securities may be of lower quality and present a greater risk to investors.

Key Takeaways

  • An unlisted security is a financial instrument that is not traded on a formal exchange because it does not meet listing requirements.
  • Unlisted securities are also called OTC securities as trading is done on the over-the-counter (OTC) market mostly by market makers.
  • Unlisted stocks can be tracked via pink sheets or on the OTCBB.

Types of Unlisted Financial Instruments

The most familiar type of unlisted security is common stock, often traded on the NASDAQ. However, stocks trading on the top tier of the NASDAQ dealer network system, the National Market System, are generally not classified as OTC because the NASDAQ is considered a stock exchange. However, stocks trading on the lower tiers, such as the OTC Bulletin Board (OTCBB) or the pink sheets fall under the OTC classification umbrella. The latter includes penny stocks, which trade for extremely low prices, while some are legitimate foreign companies that don't wish to file reports with the SEC.

There are also many unlisted non-stock instruments including corporate bonds, government securities, and certain derivative products such as swaps which are traded in the OTC market.

Risks Investors Should Know

The normal risks associated with investing are magnified with unlisted securities. Because size and other requirements for companies are reduced or eliminated, some unlisted companies may be undercapitalized, have highly risky business plans, and be no more than an idea without a plan for success.

Other unlisted transactions carry counterparty risk, liquidity concerns, and interconnection risks. This can include one side reneging on the contract. Also, since there is no formal exchange or clearing mechanism, it is up to the reputation of dealers and/or counterparties to fulfill all obligations of the transactions, including delivery of securities and payment of any monies required.