How Does the Over-The-Counter Market Work?

How Does the Over-The-Counter Market Work?
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Businesses that cannot get listed on a stock exchange are still able to sell stock in their companies by trading shares privately, referred to as trading "over the counter." You can also trade bonds, derivatives and commodities on the OTC market. OTC trades occur via telephone, email, fax or in person between private individuals, with no central exchange location for all traders. If you are looking for more investment opportunities, smaller companies that trade OTC may be worth examining.

Types of Companies

The types of companies traded OTC are generally small companies or those recently started, which results in their not being able to get listed on a stock exchange. An OTC status is not an indication that a company is not worthy of being listed on a larger exchange or not a stable company. Many profitable companies might not qualify for a listing by virtue of the fact that they do not have high-enough revenues, enough shares of outstanding stock or enough years in operation to qualify.

Reporting Requirements

When you trade in OTC securities, you have less access to information on these instruments and companies than you do with those listed on an exchange. This is because the SEC does not require the same reporting from these entities and because financial analysts often don’t research and write about these small companies and their stocks. You will have to do more homework on OTC-traded companies if you want to maximize your knowledge about the business.

OTC securities that provide the most public reporting and undergo the most formal scrutiny by the SEC are designated OTCQX. These are the most reputable OTC securities. Businesses that provide significant public information but do not report to the SEC are designated OTCQB. OTC Pink companies have no financial reporting requirements and are the most speculative.

Information Systems

You can get real-time information about OTC stocks on the OTC Bulletin Board, which is an electronic system that includes typical data you find on other systems, such as current prices, quotes and volumes. The Financial Industry Regulatory Authority oversees the OTCBB. The SEC website warns the public that fraudsters often mislead investors into believing the OTCBB is part of the NASDAQ stock market, when in fact it is not.

A business called the OTC Market Group offers a reporting system called OTC Link, also known as Pink Sheets, providing data for the most speculative OTC securities. OTC Link provides quotes, prices, volumes and services like messaging and trading. The OTCBB uses data from OTC Link for its system.

Instruments Sold

In addition to buying stocks over the counter, you can trade bonds, derivatives and commodities. Because of the less-stringent reporting requirements for some OTC instruments, fraud is more likely in the OTC arena than when you buy financial instruments listed on an exchange. You also can trade OTC using commercial online trading accounts, such as Scottrade or TD Ameritrade.