Is the OTC Market Safe?
The OTC market is generally considered risky, with lenient reporting requirements and lower transparency associated with these securities. Many stocks that trade OTC have a lower share price and may be highly volatile. While some stocks in the OTC market are eventually listed on the major exchanges, other OTC stocks fail. As with any investment, it is important to research the stocks and companies as much as thoroughly as possible.
What Is an Example of an Over-the-Counter Market?
An over-the-counter market is a market where financial securities are traded through a broker-dealer network as opposed to on a financial exchange. An over-the-counter market is not centralized and occurs between two parties, such as a trade that occurs between two individuals that buy and sell a share of a company that is not listed on an exchange. An over-the-counter market can consist of any security, such as equities, commodities, and derivatives.
How Does an Investor Buy a Security on the OTC Market?
To buy a security on the OTC market, identify the specific security to purchase and the amount to invest. OTCQX is one of the largest and most well-respected marketplaces for OTC stocks. Most of the brokers that sell exchange-listed securities also sell OTC securities and this can be done electronically on a broker's platform or via a telephone.
What Is an Over-the-Counter Derivative?
An over-the-counter derivative is any derivative security that is traded in the OTC marketplace. A derivative is financial security whose value is determined by an underlying asset, such as a stock or a commodity. An owner of a derivative does not own the underlying asset but in the case of certain derivatives, such as commodity futures, it is possible to take delivery of the physical asset after the derivative contract expires. In addition to futures, other derivatives include forwards and swaps.
What are Otcmkts?
Otcmkts, or OTC markets (over-the-counter markets), are markets where securities trade that are not listed on major exchanges in the U.S. OTC securities trade instead through a broker-dealer network often because they do not meet the requirements of the major exchanges.
Over-the-counter (OTC) securities are traded without being listed on an exchange.
Securities that are traded over the counter may be facilitated by a dealer or broker specializing in OTC markets.
OTC trading helps promote equity and financial instruments that would otherwise be unavailable to investors.
Companies with OTC shares may raise capital through the sale of stock.
Types of OTC Securities
Stocks
The equities that trade via OTC are often small companies prohibited by the $295,000 cost to list on the NYSE and up to $75,000 on Nasdaq. Some well-known large companies are listed on the OTC markets, such as Allianz SE, BASF SE, Roche Holding Ag, and Danone SA.
Bonds
Bonds do not trade on a formal exchange but banks market them through broker-dealer networks and they are also considered OTC securities.
Derivatives
Derivatives are private contracts arranged by a broker and can be options, forwards, futures, or other agreements whose value is based on that of an underlying asset, like a stock.
ADRs
American Depositary Receipts (ADRs), sometimes called ADSs or bank certificates represent a specified number of shares of a foreign stock.
Foreign Currency
Foreign currencies that trade on the Forex, an over-the-counter currency exchange.
Cryptocurrency
Cryptocurrencies, like Bitcoin and Ethereum trade on the OTC market.