“Because there’s less regulation, they’re known to be targets of market manipulation where prices can be manipulated. It involves a lot of risk because you’re buying typically less reputable securities. Another notable difference between the two is that on an exchange, supply and demand determine the price of the assets.

There are a number of reasons why a security might be traded OTC rather than on an exchange, including the size of the company and the country where it is based. If a company is too small to meet the requirements for an exchange, or otherwise can’t be traded on a standard market exchange, they might opt to sell its securities OTC. The over-the-counter market—commonly known as the OTC market—is where securities that aren’t listed on the major exchanges are traded. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor.

  1. The value of Bonds fluctuate and any investments sold prior to maturity may result in gain or loss of principal.
  2. OTC Markets Group (OTCM 1.83%) is the name of a company that operates a public market for securities that, for one reason or another, don’t trade on major stock exchanges such as the NYSE and the Nasdaq.
  3. Public Investing is a wholly-owned subsidiary of Public Holdings, Inc. (“Public Holdings”).
  4. Instead, most are exchanged OTC on the secondary market via broker-dealers.
  5. An indication of interest to purchase securities involves no obligation or commitment of any kind.

Our partners cannot pay us to guarantee favorable reviews of their products or services. 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. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. Finally, because of the highly speculative and higher risk backdrop of investing in OTC securities, it’s important to invest only an amount of money that you are comfortable losing.

Known as the “venture market,” this market entails a moderate amount of oversight, and it shares some information with the SEC.

Alternative Assets.Brokerage services for alternative assets available on Public are offered by Dalmore Group, LLC (“Dalmore”), member of FINRA & SIPC. “Alternative assets,” as the term is used at Public, are equity securities that have been issued pursuant to Regulation A of the Securities Act of 1933 (as amended) (“Regulation A”). These investments are speculative, involve substantial risks (including illiquidity and loss of principal), and are not FDIC or SIPC insured.

Ratings are not recommendations to purchase, hold, or sell securities, and they do not address the market value of securities or their suitability for investment purposes. In practice, buying and selling OTC securities may not feel much different than buying and selling securities that trade on a simple and effective exit trading strategies major exchange due to electronic trading. Also, you can trade many OTC securities using most mainstream brokerage accounts. But OTC networks lack the rigorous financial reporting and transparency standards of major stock exchanges, so extra caution and due diligence is required from investors.

Listing on a standard exchange is an expensive and time-consuming process, and often outside the financial capabilities of many smaller companies. There are benefits of OTC securities, but consider the risks involved, and decide whether they align with your financial goals. OTC markets provide opportunities for bigger moves, but because of reduced regulation, the reverse could also happen, Soscia says. OTC securities can trade via alternative trading systems such as the OTC Markets Group, a tiered electronic system used by broker-dealers to publish prices for OTC securities. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research.

What Is The OTC Market?

If you’re curious about OTC trading, Public offers over 300 OTC stocks that you can invest in using our online investment platform. Investors can trade OTC on Public with the same available funds they would use for any other trade, and users with funded accounts automatically have access to OTC trading. Bonds, ADRs, and derivatives trade in the OTC marketplace, however, investors face greater risk when investing in speculative OTC securities.


In OTC markets, the broker-dealer determines the security’s price, which means less transparency. There’s a possibility that there could be fraud at the very lowest level of the pink sheet market,” he says. 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 marijuana is still illegal on the federal level in the U.S.

While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. Most stocks trade on a major stock exchange, like the Nasdaq or the New York Stock Exchange. But some securities trade on decentralized marketplaces known as over-the-counter (OTC) markets. There are a number of reasons a stock may trade on OTC markets, but often it’s because the company can’t meet the stringent requirements of a major exchange. Learn how OTC trading works and what you should know before investing in OTC securities. 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.

Risks and rewards

These brokers look for buyers or sellers willing to take the other side of the trade, and they may not find one. Therefore, securities on OTC markets are typically much less liquid than those on exchanges. Because of this structure, stocks may not trade for months at a time and may be subject to wide spreads between the buyer’s bid price and the seller’s ask price (i.e., wide bid-ask spreads). In addition to the decentralized nature of the OTC market, a key difference is the amount of information that companies make available to investors. When stocks are listed on formal exchanges, investors can typically access a great deal more information on them, including reports written by Wall Street analysts, company news and filings, and real-time trading data.

Identifying which of the three OTC markets a stock is in can help guide your determination of a company’s relative investment risk—even though that information alone won’t help you decide if it’s a good investment opportunity. That’s why it’s still important to research the stocks and companies as much as possible, thoroughly vetting the available information. In an OTC market, dealers act as market-makers by quoting prices at which they will buy and sell a security, currency, or other financial products. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was completed. In general, OTC markets are typically less transparent than exchanges and are also subject to fewer regulations. To buy a security on the OTC market, investors identify the specific security to purchase and the amount to invest.

OTC investing carries a higher amount of risk than exchange-traded stocks due to lower liquidity and higher volatility in the market. OTC markets are less regulated than exchanges and have more lax reporting requirements. That’s why it’s always important to research OTC stocks as you would any other investment in order to understand the risks involved with investing. In contrast, the OTC markets consist of broker-dealers at investment banks and other institutions that phone around to other brokers when a trader places an order.

What’s more, the quoted prices may not be as readily available—with less liquidity, these stocks are prone to big swings in prices. 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.

“The top tier of the OTC market is pretty safe and chances are pretty good. The requirements are there’s enough known about a company that is probably not too risky,” he says. While it’s easy to buy OTC stocks, the tougher question to answer is whether you should buy OTC stocks.


Leave a Reply

Your email address will not be published. Required fields are marked *