These third parties are known as brokers, and they have access to platforms that offer tradable securities. To buy shares of an OTC stock, you’ll need to know the company’s ticker symbol and have enough money in your brokerage account to buy the desired number of shares. It’s worth noting that brokers may have special margin requirements and other restrictions with OTC stocks. For example, OTC stocks might not be eligible for fractional share trading. For example, you’ll often find international stocks (including many large and well-known companies) listed on the OTC markets. Stocks listed on U.S. exchanges that primarily trade in foreign markets are known as American Depository Receipts, or ADRs.

What is OTC trading? How to trade securities over-the-counter

OTC markets offer access to emerging companies that may not meet the listing requirements of major exchanges. These smaller, growing companies can sometimes provide investors with the potential for higher returns, although this comes with higher risk. OTC markets have less stringent listing requirements and disclosure rules.

• The unique structure of the OTC market enables specific strategies that are not possible on a public exchange.
• If you want to compare other brokers, check out the best brokers for stock trading.
• Disclosure and reporting requirements are more lax, so there is more uncertainty about the companies’ financials and operations.
• These transactions are written directly into the exchange’s order book.
• These smaller, growing companies can sometimes provide investors with the potential for higher returns, although this comes with higher risk.

What is OTC trading?

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. Traders also looked to the Pink Sheets, now known as OTC Markets Group, over a century ago as a paper-based system for trading unlisted securities. The term “Pink Sheets” derived from the pink-colored paper on which the bid and ask prices of these securities were printed and circulated.

Q. What kinds of securities trade on OTC markets?

OTC markets typically have lower trading volume, which results in greater volatility and wider bid-ask spreads. It may take longer to buy or sell shares, and at a less favorable price. Investors should be prepared to hold OTC positions longer and risk greater losses, despite the potential for outsized gains. Over-the-counter, also known as OTC trading, is the way of buying and selling financial instruments via decentralised networks. Anyone that’s traded cryptocurrencies such as Bitcoin will have heard of the term decentralised. The fundamental concept of decentralisation is the same way to OTC trading.

What’s interesting is that the decentralised nature of this type of trading means that non-standard items can be bought/sold via the OTC market. This means that assets don’t always need to have a clearly defined range of quality or quantity. A trader may pay a slightly wider spread, but in return, they can execute a very large block trade with zero price slippage and complete privacy. The decentralized, opaque nature of the OTC world can present formidable challenges, particularly for any firm lacking sophisticated infrastructure and due diligence protocols. Once the terms are acceptable, the trade is agreed upon either verbally or electronically, followed by a formal confirmation. For a liquid crypto trade, this agreement can take less than a minute; for a complex derivative, it could take several hours.

61% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX, or any of our other products work and whether you can afford to take the high risk of losing your money. The offers that appear on this site are from companies that compensate us.

OTC markets provide opportunities for emerging companies and microcap stocks that do not yet meet the listing requirements of major exchanges. They also appeal to speculative traders looking to capitalize on the volatility and potential price inefficiencies of smaller, lesser-known companies. However, the additional risks mean OTC markets may not suit all investors. Thorough research and due diligence is vital before investing in any OTC stock. The over-the-counter (OTC) market allows direct trading of various securities, like stocks and bonds, between counterparties without centralized exchanges. This market provides investors with unique opportunities to access a diverse range of securities and assists smaller companies in raising capital.

Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Although it’s easy to buy OTC stocks, the tougher question to answer is whether you should buy OTC stocks. A complete guide to the interest coverage ratio — what it is, how it works, and why it matters for your business or investments. The entire process can unfold almost instantly via a secure chat application, an API hook, or a purpose-built execution platform. The Commodity Futures Trading Commission (CFTC) regulates OTC derivatives contracts and currency transactions. Placing an OTC order is similar to placing one on a regular exchange.

What is OTC Trading? A Complete Guide for 2025

If you want to compare other brokers, check out the best brokers for stock trading. We believe everyone should be able to make financial decisions with confidence. FINRA monitors market makers and broker-dealers, enforcing rules against abusive practices like fraud and insider trading. Our InvestingPro platform provides investors a way to screen and analyze securities across all tiers of the OTC markets. OTC-listed companies are often in exciting high-tech fields like biotech, green energy, and fintech. While risky, the potential for high reward is appealing to many investors.

Leadership and Transparency

Investors should exercise caution, especially with thinly traded penny stocks, as there is greater potential for fraud and manipulation. An over-the-counter (OTC) market refers to a decentralized market where participants trade securities directly between each other, rather than through an exchange. OTC markets are regulated and organized differently than major exchanges like the New York Stock Exchange (NYSE) or Nasdaq. You can see the types of securities available to OTC traders later in this guide. It’s important to highlight that over-the-counter trading is where buying/selling takes place across a decentralised network of brokers. This means orders aren’t placed directly with an exchange, a central authority.

Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity’s jurisdiction. Those are some of the key reasons that a company might file to list its stock over the counter.

• OTC trading is a crucial element of the global financial system, allowing a diverse range of financial instruments to be traded outside of centralised exchanges.
• OTC trading is the buying and selling of financial instruments outside of such an exchange.
• Another notable difference between the two is that on an exchange, supply and demand determine the price of the assets.
• A trader may pay a slightly wider spread, but in return, they can execute a very large block trade with zero price slippage and complete privacy.

Liquidity is often lower as well, meaning it may be difficult to buy or sell shares when desired. Volatility also tends to be higher, resulting in larger price swings. Investors should evaluate companies based on the specific market tier and designation to determine if an OTC stock meets their investment objectives regarding transparency, liquidity, and risk.

OTC trading is the buying and selling of financial instruments outside of such an exchange. Investing in OTC securities is possible through many online discount brokers, which typically provide access to OTC markets. 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. OTC markets in the U.S. are regulated by the Securities and Exchange Commission (SEC). However, the securities traded on Capital markets definition OTC markets are not subject to the same strict listing standards as major exchanges.

The case is, of course, one of many OTC frauds targeting retail investors. Glaspie pleaded guilty in 2023 to defrauding more than 10,000 victims of over $55 million through his “CoinDeal” investment scheme. After evaluating the quotes and considering the company’s prospects, MegaFund buys 30,000 shares from OTC Securities Group at $0.85 per share.

Companies on OTC markets do not need to meet the minimum standards for shares, market capitalization, or financial disclosure that the major exchanges mandate. While this means OTC markets offer access to emerging companies, investors take on more risk. That’s just one use of OTC markets, which involve two parties trading either directly or through broker-dealers rather than on a centralized exchange. Securities traded on OTCs include stocks—many are also listed on U.S. exchanges—bonds, derivatives, and cryptocurrencies.