Table of Contents
Most investors are familiar with ordinary exchange-traded stocks, but there’s another equity category known as over-the-counter stocks (OTC) — which aren’t necessarily available on public exchanges like the New York Stock Exchange (NYSE) or Nasdaq.
Rather, OTC stocks are traded through a broker-dealer network, known as OTC markets — which can include other types of securities, as well. The Financial Industry Regulatory Authority (FINRA) oversees broker-dealers that engage in OTC trading, but in general OTC markets are less transparent, and less regulated than public exchanges.
OTC stocks may include companies that are too small to trade on public exchanges, as well as some types of foreign securities, bonds, and derivatives.
Key Points
• Over-the-counter stocks are generally not available to trade on public exchanges, but some can be traded OTC as well as being listed on a national exchange.
• OTC stocks are traded through broker-dealer networks, also called OTC markets or Alternative Trading Systems (ATS).
• OTC markets are not limited to OTC stocks, but may include other types of securities: e.g., derivatives, corporate bonds, forex, and more.
• Certain OTC companies may be too small, or may not meet the criteria to trade on public exchanges.
• OTC markets tend to be less regulated than the public markets, and therefore less transparent, which can increase the risk of OTC trading.
What Are OTC Stocks?
As mentioned, an OTC stock is one that trades outside of a traditional public stock exchange. Although some OTC stocks may be available to trade either way.
Some OTC-traded stocks are exchange-listed, and some are unlisted (because they may not meet the criteria for the exchange).
A public stock exchange — like NYSE or Nasdaq — is a closely regulated environment in which buyers and sellers can trade shares of publicly listed companies. Before a stock can be listed on an exchange for public trading, it first has to meet the guidelines established by that exchange.
Companies may opt to trade shares in the over-the-counter market (meaning, they trade through a broker-dealer which typically relies on an Alternative Trading System, or ATS, to place trades) if they’re unable to meet the listing requirements of a public exchange. OTC trading may also appeal to companies that were previously traded on an exchange but were later delisted.
How to Buy OTC Stocks
Investors interested in purchasing OTC stocks may not need to change their investing strategy much, because depending on the exchange or platform they use to buy listed investments, they may be able to buy OTC stocks in much the same way.
Again, this will largely depend on the platform being used, but many — but not all — exchanges or platforms allow investors to trade OTC stocks. This can be done by searching for the OTC stock on the platform and placing an order. Investors may need to know the specific stock ticker they’re looking for, however, so there may be a bit of initial homework involved.
Types of OTC Securities
OTC trading tends to focus on equities, i.e. stocks.
One common type of stock available OTC is penny stocks, which tend to be higher risk. These small- or even micro-cap companies have less transparency because they don’t have to meet certain requirements for public exchanges. In addition, they tend to trade at low volumes, which makes these shares less liquid, and contributes to volatility.
But stocks don’t make up the entirety of OTC trading activity. Other types of investments that can be traded OTC include:
• Certain types of derivatives
• Corporate bonds
• Government securities
• Commodities
Altogether, there are thousands of securities that trade OTC. These can include small and micro-cap companies, large-cap American Depositary Receipts (ADRs), and foreign ordinaries (international stocks that are not available on U.S. exchanges).
Companies that trade over the counter may report to the SEC, though not all of them do.
Types of OTC Markets
In the U.S., the majority of over-the-counter trading takes place on networks operated by OTC Markets Group.
This company runs the largest OTC trading marketplace and quote system in the country (the other main one is the OTC Bulletin Board, or OTCBB). While companies that trade their stocks on major exchanges must formally apply and meet listing standards, companies quoted on the OTCBB or OTC Markets do not have to apply for listing or meet any minimum financial standards.
OTC Markets Group organizes OTC stocks and securities into three distinct markets:
• OTCQX
• OTCQB
• Pink Sheets
OTCQX
OTCQX is the first and highest tier, and is reserved for companies that provide the most detail to OTC Markets Group for listing. Companies listed here must be up-to-date with regard to regulatory disclosure requirements and maintain accurate financial records.
Penny stocks, shell corporations, and companies that are engaged in a bankruptcy filing are excluded from this grouping. It’s common to find stocks from foreign companies (e.g. foreign ordinaries) listed here.
OTCQB
The middle tier is designed for companies that are still in the early to middle stages of growth and development. 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.
Pink Sheets
The Pink Sheets or Pink Open Market has no minimum financial standard that companies are required to meet, nor do they have reporting or SEC registration requirements. These are only required if the company is listed on a Qualified Foreign Exchange.
Be forewarned: OTC Markets Group specifies that the Pink Market is designed for professional and sophisticated investors who have a high risk tolerance for trading companies about which little information is available.
Pros and Cons of OTC Trading
Investing can be risky in general, but the risks may be heightened with trading OTC stocks. But trading higher risk stocks could result in bigger rewards if they deliver above-average returns.
When considering OTC stocks, it’s important to understand how the potential positives and negatives may balance out — if at all. It’s also helpful to consider your personal risk tolerance and investment goals to determine whether it makes sense to join the over-the-counter market.
|
Trading OTC Stocks: Pros and Cons |
|
|---|---|
| OTC Stock Trading Pros | OTC Stock Trading Cons |
| Over-the-counter trading may be suitable for investors who are interested in early stage companies that have yet to go public via an IPO. | Micro-cap stocks and nano-cap stocks that trade OTC may lack a demonstrated performance track record. |
| Investing in penny stocks can allow you to take larger positions in companies. | Taking a larger position in a penny stock could amplify losses if its price declines. |
| OTC may appeal to active traders who are more interested in current pricing trends than fundamentals. | Limited information can make it difficult to assess a company’s financials and accurately estimate its value. |
| OTC trading makes it possible to invest in foreign companies or companies that may be excluded from public exchanges. | OTC securities are subject to less regulation than stocks listed on a public exchange, which may increase the possibility of fraudulent activity. |
| OTC stocks may be more illiquid than stocks traded on a public exchange, making it more difficult to change your position. | |
The Takeaway
OTC stocks are those that trade outside of traditional exchanges like the NYSE or Nasdaq, and rely on a network of broker-dealers to conduct trades. The OTC market gives you access to different types of securities, including penny stocks, international stocks, derivatives, corporate bonds, and even cryptocurrency.
If you’re interested in OTC trading, the first step is to consider how much risk you’re willing to take on, and how much money you’re willing to invest when trading stocks. Having a baseline for both can help you to manage risk and minimize your potential for losses.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
How do OTC stocks differ from stocks listed on major exchanges?
OTC stocks aren’t listed on major U.S. stock exchanges. They can still be traded via broker dealer networks; but how they’re listed (or not listed) is the primary differentiator.
How can I buy or sell OTC stocks?
Many investors can use their preferred brokerage or platform to buy and sell OTC stocks. Not all brokerages or investment platforms allow investors to do so, but many do, and trading them often involves searching for the appropriate ticker and executing a trade.
Are there any specific regulations or reporting requirements for OTC stocks?
There are reporting standards for OTC stocks, but those standards are not as stringent as listed stocks. Depending on the OTC market on which an OTC stock trades, more or less reporting may be required.
What are the main factors to consider when researching OTC stocks?
Investors should consider many factors in the OTC market, but among them are volatility, liquidity and trading volume, and applicable regulations. These three factors may have the biggest impact on how an OTC stock performs going forward, though that’s not guaranteed.
Are there any restrictions or limitations on trading OTC stocks?
The OTC markets don’t usually come with many restrictions. But public exchanges, brokerages, or platforms might not permit investors to trade OTC stocks or securities. In that case, investors can look for another platform on which to execute trades that does allow OTC trading.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/JohnnyGreig
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.
Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.
All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.
SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOIN-Q325-071