Over-the-counter (OTC) refers to the practice of exchanging shares for businesses not listed on a public exchange, such as the New York Stock Exchange (NYSE).
A broker-dealer network is as a middleman for over-the-counter traded shares. It is as opposed to a centralized market. These securities do not meet the criteria to have a regular exchange listing.
Trade transactions take place via the Over the Counter Bulletin Board (OTCBB) or the listing services for the Pink Sheets. A Pink Sheet corporation is a private firm that partners with broker-dealers to sell shares in small companies. The OTCBB is an online quotation and trading service that encourages increased liquidity and a better exchange of information.
Stocks traded via OTC are usually smaller companies that can not meet formal exchange listing requirements. However, there are several other forms of stock trading. Stocks traded on exchanges refers to as listed stocks. Meanwhile, stocks traded through OTC refers to as unlisted stocks.
1. Types of Securities Traded OTC
The equities traded by OTC are not just small businesses. There are some well-known large companies listed on the OTC exchanges. The OTCQX, for example, trades shares of multinational firms such as Nestle SA, Bayer A.G., Allianz SE, BASF SE, Roche Holding Ag, and Danone SA.
Instruments like bonds do not trade on a formal exchange as banks issue and market these debt instruments through broker-dealer networks. They are also viewed as OTC stocks. Banks save the expense of the exchange listing fees by mixing buys and sales directly from customers or from another brokerage service.
Many financial instruments also trade through the dealer network, such as derivatives.
2. OTC Networks
The OTC Markets Group runs some of the most well-known networks, including Best Market (OTCQX), Venture Market (OTCQB), and the Pink Open Market. While OTC networks are not formal exchanges such as the NYSE, the criteria for eligibility still apply.
The OTCQX, for example, does not mention the stocks that sell for less than five dollars — known as penny stocks — shell firms, or bankrupt companies. The OTCQX Best Market features business shares with the highest market caps and greater liquidity than the other exchanges.