OTC Markets: What They Are And How They Work

The value of Bonds fluctuate and any investments sold prior to maturity may result in gain or loss of principal. In general, when interest rates go up, Bond prices typically drop, and vice versa. Bonds with higher yields or offered by issuers with lower credit ratings generally carry a higher degree of risk. All fixed income securities are subject to price change and availability, and yield is subject to change.

You’ll also find stocks on the OTC markets that cannot list on the NYSE or the Nasdaq for legal or regulatory reasons. Companies that operate cannabis-related businesses often have to list on the OTC markets because https://www.dowjonesrisk.com/ marijuana is still illegal on the federal level in the U.S. At that time, you could buy shares from your buddy in a coffee shop or a bar. Of course, we’re still talking about companies with little to no regulation.

The fact that ADRs are traded over the counter doesn’t make the companies riskier for investment purposes. The over-the-counter market—commonly known as the OTC market—is where securities that aren’t listed on the major exchanges are traded. This is for informational purposes only as StocksToTrade is not registered as a securities broker-dealer or an investment adviser. Investment Plans (“Plans”) shown in our marketplace are for informational purposes only and are meant as helpful starting points as you discover, research and create a Plan that meets your specific investing needs. Plans are self-directed purchases of individually-selected assets, which may include stocks, ETFs and cryptocurrency. Plans are not recommendations of a Plan overall or its individual holdings or default allocations.

This is not an offer, solicitation of an offer, or advice to buy or sell securities or open a brokerage account in any jurisdiction where Public Investing is not registered. Securities products offered by Public Investing are not FDIC insured. Apex Clearing Corporation, our clearing firm, has additional insurance coverage in excess of the regular SIPC limits. Over-the-counter (OTC) markets are stock exchanges where stocks that aren’t listed on major exchanges such as the New York Stock Exchange (NYSE) can be traded. The companies that issue these stocks choose to trade this way for a variety of reasons. All investments involve the risk of loss and the past performance of a security or a financial product does not guarantee future results or returns.

While it’s easy to buy OTC stocks, the tougher question to answer is whether you should buy OTC stocks. FINRA also regulates the OTC Bulletin Board and OTC Link ATS. Those are systems through which broker-dealers post price and volume. Only broker-dealers qualified with FINRA are allowed to apply to quote securities. Remember that OTCs are the underbelly of the stock market, where many companies go to die. If you wind up holding the bag on some of these OTCs, you could be holding the bag for life.

What is the over-the-counter market?

In addition to the decentralized nature of the OTC market, a key difference is the amount of information that companies make available to investors. A portfolio manager owns about 100,000 shares of a stock that trades on the over-the-counter market. The PM decides it is time to sell the security and instructs the traders to find the market for the stock. After calling three market makers, the traders come back with bad news. The stock has not traded for 30 days, and the last sale was $15.75, and the current market is $9 bid and $27 offered, with only 1,500 shares to buy and 7,500 for sale. At this point, the PM needs to decide if they want to try to sell the stock and find a buyer at lower prices or place a limit order at the stock’s last sale with the hope of getting lucky.

Because they trade like most other stocks, you can buy and sell OTC stocks through most major online brokers. In order to buy shares of an OTC stock, you’ll need to know the company’s ticker symbol and have enough money in your brokerage account to buy the desired number of shares. Some are shell companies or companies on the verge of bankruptcy — or in bankruptcy.

How Does The OTC Market Work?

Investors are familiar with trading on an exchange such as the NYSE or Nasdaq, with regular financial reports and relatively liquid shares that can be bought and sold. On an exchange, market makers – that is, big trading firms – help keep the liquidity high so that investors and traders can move in and out of stocks. Exchanges also have certain standards (financial, for example) that a company must meet to keep its stock listed on the exchange. The over-the-counter market refers to securities trading that takes place outside of the major exchanges. There are more than 12,000 securities traded on the OTC market, including stocks, exchange-traded funds (ETFs), bonds, commodities and derivatives.

1. Commission-free trading refers to $0 commissions charged on trades of US listed registered securities placed during the US Markets Regular Trading Hours in self-directed brokerage accounts offered by Public Investing.
2. If you’re curious about OTC trading, Public offers over 300 OTC stocks that you can invest in using our online investment platform.
3. The stakes are high, but the potential for tremendous gains is there.
4. If you wind up holding the bag on some of these OTCs, you could be holding the bag for life.
5. Bond ratings, if provided, are third party opinions on the overall bond’s credit worthiness at the time the rating is assigned.

There is much less available information on stocks traded OTC. Less transparency and regulation means that the OTC market can be riskier for investors, and sometimes subject to fraud. What’s more, the quoted prices may not be as readily available—with less liquidity, these stocks are prone to big swings in prices.

Risks of OTC Stocks

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Motley Fool Investing Philosophy

While the New York Stock Exchange (NYSE) and the Nasdaq get all the press, over the counter markets, or OTC markets, list more than 11,000 securities across the globe for investors to trade. Here’s a rundown of how the over-the-counter stock markets work and the types of securities you might find on the OTC markets. We’ll also discuss some other key information you should know before you decide whether OTC stocks are right for you. OTC markets are primarily used to trade bonds, currencies, derivatives, and structured products. They can also be used to trade equities, with examples such as the OTCQX, OTCQB, and OTC Pink marketplaces (previously the OTC Bulletin Board and Pink Sheets) in the U.S. OTC markets are regulated by the Financial Industry Regulatory Authority (FINRA).

Understanding OTC

The American depositary receipts (ADRs) of many companies trade on OTC markets. A broker-dealer is a person or institution that buys and sells securities. Broker-dealers are required to register with the Security Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA).