What Is The OTC Market?

The over-the-counter market—commonly called the OTC market—is where securities that aren't listed on the major exchanges are traded.

Stocks and bonds that trade on the OTC market are usually from smaller companies that don't meet the requirements to be listed on a significant exchange.
How Does The OTC Market Work?

The over-the-counter market refers to securities trading that happens outside 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.

Unlike traditional exchanges such as the New York Stock Exchange (NYSE) or the Nasdaq, there is no physical location associated with the OTC market. Rather, all trades occur electronically and directly between two parties in a decentralized market.

Even though OTC securities aren't “listed” with the major exchanges, these companies can still sell their stocks to the public within the counter. To the typical investor, buying stocks in the OTC market may appear no different than the same process for exchange-listed securities: Stocks are assigned a distinctive ticker symbol, and typically are available for trading via the major online brokers.

The OTC market is the default exchange for a few securities, like corporate bonds. It's also a feasible alternative for companies that don't meet or maintain the requirements—like number of shareholders or monthly trading volumes—to list their shares on the major exchanges.

Alternatively, some companies may opt to keep “unlisted” on the OTC market by choice, perhaps because they don't really want to pay for the listing fees or be subject to an exchange's reporting requirements.

Differences Involving the OTC Market and Stock Exchanges

There are a few core differences between the OTC market and formal stock exchanges.

In addition to the decentralized nature of the OTC market, a vital difference is the quantity of information that companies make offered to investors. When stocks are listed on formal exchanges, investors can typically access a great deal more information to them, including reports written by Wall Street analysts, company news and filings, and real-time trading data.

There is not as available informative data on stocks traded OTC. Less transparency and regulation ensures that the OTC market could be riskier for investors, and sometimes susceptible to fraud. What's more, the quoted prices may not be as readily available—with less liquidity, these stocks are susceptible to big swings in prices.

For instance, penny stocks are traded in the over-the-counter market, and are notorious for being highly risky and subject to scams and big losses.

Nevertheless, the OTC market can be home to many American Depository Receipts (ADRs), which let investors buy shares of foreign companies. The fact that ADRs are traded non-prescription doesn't make the firms riskier for investment purposes.

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