The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. To buy a security on the OTC market, investors identify the specific security to purchase and the amount to invest. Most brokers that sell exchange-listed securities also sell OTC securities electronically on a online platform or via a telephone. Since the exchanges take in much of the legitimate investment capital, stocks listed on them have far greater liquidity. OTC securities, meanwhile, often have very low liquidity, which means just a few trades can change their prices fast, leading to significant volatility.

Pros and Cons of the OTC Market

Swiss food and drink company Nestle (NSRGY -0.29%) is an example of a major company that trades OTC in the U.S. While it’s listed on the SIX Swiss Stock Exchange, the company’s shares are only available as ADRs through the Pink Sheets in the U.S. Impact on your credit may vary, as credit scores are independently determined by credit bureaus based on a number of factors including the financial decisions you make with other financial services organizations. We believe everyone should be able to make financial decisions with confidence.

1. However, it’s essential to note that not all brokers offer the same level of access or support for OTC investments.
2. They are issued by a U.S. depositary bank, providing U.S. investors with exposure to foreign companies without the need to directly purchase shares on a foreign exchange.
3. Trading stocks OTC can be considered risky as the companies do not need to supply as much information as exchange-listed companies do.
4. TechVision eventually purchases 20,000 shares at $0.95 per share from another market maker.
5. Seeking the guidance of a qualified financial professional can also help you navigate the complexities of these markets.

OTC Markets

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. You’ll also find stocks on the OTC markets that cannot list on the NYSE or the Nasdaq for legal or regulatory reasons. The unregulated nature of OTC trading means that there is a higher risk of a counterparty defaulting on any given agreement. 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. After evaluating the quotes and considering the company’s prospects, MegaFund buys 30,000 shares from OTC Securities Group at $0.85 per share. The trade is executed directly between MegaFund and OTC Securities Group through a private negotiation.

What is an over-the-counter market?

But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. As we’ve seen, some types of stocks trade on the OTC markets for very good reasons, and they could make excellent investment opportunities. On the other hand, many OTC stocks are issued by highly speculative businesses or even outright fraudulent companies involved in pump-and-dump scams. There’s a possibility that there could be fraud at the very lowest level of the pink sheet market,” he says.

OTC markets offer the chance to find hidden gems, but also the potential to wind up stuck in a scam stock that you are unable to sell before it becomes worthless. But for investors willing to do the legwork, the OTC markets offer opportunities beyond the big exchanges. Usually, a trader has the OTC security, then it goes to a broker-dealer, and then the broker-dealer trades it to the person who’s buying it. The security’s price isn’t listed publicly as it would be on an exchange regulated by the Securities and Exchange Commission, says Brianne Soscia, a CFP from Wealth Consulting Group based in Las Vegas. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor.

It involves a lot of risk because you’re buying typically less reputable securities. Let’s say a small company wants to sell its stock but doesn’t meet the prerequisites of an exchange, such as reaching a minimum share price or having a certain number of shareholders. 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. Our partners cannot pay us to guarantee favorable reviews of their products or services.

The OTC market is where securities trade via a broker-dealer network instead of on a centralized exchange like the New York Stock Exchange. Over-the-counter trading can involve stocks, bonds, and derivatives, which are financial contracts that derive their value from an underlying asset such as a commodity. OTC markets may also offer more flexibility in trading than traditional exchanges.

One market maker, OTC Securities Group, offers to sell 50,000 shares at $0.85 per share. Another market maker, Global Trading Solutions, offers to sell a smaller block of 10,000 shares at $0.90 per share. OTC markets provide access to securities not listed on major exchanges, including shares https://forexanalytics.info/ of foreign companies. This allows investors to diversify their portfolios and gain exposure to international markets and companies that may not be available through traditional exchanges. For example, many hugely profitable global companies that are listed on foreign exchanges trade OTC in the U.S. to avoid the additional regulatory requirements of trading on a major U.S. stock exchange.

However, it’s essential to note that not all brokers offer the same level of access or support for OTC investments. Some brokers may limit trading in certain OTC securities (such as “penny stocks”) or charge higher fees for these transactions. Suppose you manage a company looking to raise capital but don’t meet the stringent requirements to list on a major stock exchange. Or you’re an investor seeking to trade more exotic securities not offered on the New York Stock Exchange (NYSE) or Nasdaq. Enter the over-the-counter (OTC) markets, where trading is done electronically.

The case is, of course, one of many OTC frauds targeting retail investors. Glaspie pleaded 7 trading strategies every trader should know guilty in 2023 to defrauding more than 10,000 victims of over $55 million through his “CoinDeal” investment scheme. Tens of thousands of small and micro-capitalization companies are traded over-the-counter around the world. Although it’s easy to buy OTC stocks, the tougher question to answer is whether you should buy OTC stocks. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more.

We’ll also discuss some other key information you should know before you decide whether OTC stocks are right for you. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. The information in this site does not contain (and should not be construed as containing) investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument.

In the U.S., the National Association of Securities Dealers (NASD), later the Financial Industry Regulatory Authority (FINRA), was established in 1939 to regulate the OTC market. Most common stocks with real potential are priced over $15 per share and are listed on the NYSE or Nasdaq. Stocks priced below $5, which trade over-the-counter, may have murkier financial outlooks and are generally speculative and very risky. OTC stocks are known as penny stocks because they generally trade for less than $5 per share. The companies that sell them usually have a market capitalization of $50 million or less.

Penny stocks have always had a loyal following among investors who like getting a large number of shares for a small amount of money. If the company turns out to be successful, the investor ends up making a bundle. 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. Historically, the phrase trading over the counter referred to securities changing hands between two parties without the involvement of a stock exchange. However, in the U.S., over-the-counter trading is now conducted on separate exchanges.

OTC trades have greater flexibility when compared to their more regulated and standardised exchange-based counterparts. This means that you can create agreements that are specific to your trading goals. Stocks and other financial instruments can also be traded OTC – this includes derivatives such as swaps and forward contracts. “Because there’s less regulation, they’re known to be targets of market manipulation where prices can be manipulated.