OTC Market

Most people, even if they don't trade stocks on a daily basis, know of the major stock exchanges, such as the NYSE, the NASDAQ and the London Stock Exchange. However, there are a lot of companies that don't trade on the world's major stock exchanges; their stocks and securities are offered on the OTC (over the counter) market. Here, you will learn more about the over the counter market and how it works.

Unlike the major stock exchanges, the OTC market has no central location. Instead, OTC items are traded over Internet, fax and the phone. Corporate bonds, equity securities and government securities are traded, and companies choose to trade on the OTC market for different reasons. Sometimes, the company does not meet the standards required for listing on a major exchange, or in other cases, the security is too volatile or not traded often enough.

There are two well-known examples of trading networks in the OTC market; the Pink Sheets and the Over The Counter Bulletin Board. The Pink Sheets, held by a private company, runs a quotes system for dealer/brokers, and does not require that companies meet certain standards to be listed. Here, shares are thinly traded and the listed companies are usually quite small. The OTCBB runs another system for dealer/brokers, and they also display quotes, prices and volume for select OTC securities. The OTCBB is regulated by FINRA, which is a division of the SEC. To be listed on the OTCBB, a company has to file reports with the SEC or with its industry's regulatory board.

The main disadvantage to using Pink Sheets is that many of their companies do not file financial statements or reports with the SEC. Therefore, it's difficult for potential investors to find up-to-date information on the companies. Pink Sheets got its name from the color of the paper the dealer quotes were printed on. On the OTC market, some securities are called penny stocks; the definition isn't set in stone, but in most cases, a penny stock is a share in a company that doesn't sell on the major exchanges and sells for a penny or less. Penny stocks are considered risky because of the lack of regulation and oversight.