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OTC Markets: What They Are And How They Work
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OTC Markets: What They Are And How They Work
Over-the-counter, or OTC, markets are decentralized financial markets that give investors access to smaller, unlisted companies, foreign currencies, derivatives and other securities.
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8 years of experience Expertise Retirement credit wellnessElizabeth Ayoola is a Lead Multimedia Producer and Co-Host of the "Smart Money" podcast. Before delving into the podcast world, Elizabeth acquired over ten years of experience as a writer, and seven were spent covering personal finance topics. Her journey to finance writing started with a goal to learn as much as she could about how to attain financial freedom and share information with others about how to do it, too. This led her to Debt.com, where she covered topics relating to mortgages, debt and credit. Her articles have appeared on platforms like Washington Post, The Associated Press, The Washington Post, Yahoo, Essence, The Knot, PopSugar and Parents.com. Elizabeth has also done extensive spokesperson work and appeared on multiple renowned national networks like Good Morning America, ABC, NBC, and Fox to discuss money.
Elizabeth Ayoola is a Lead Multimedia Producer and Co-Host of the "Smart Money" podcast. Before delving into the podcast world, Elizabeth acquired over ten years of experience as a writer, and seven were spent covering personal finance topics. Her journey to finance writing started with a goal to learn as much as she could about how to attain financial freedom and share information with others about how to do it, too. This led her to Debt.com, where she covered topics relating to mortgages, debt and credit. Her articles have appeared on platforms like Washington Post, The Associated Press, The Washington Post, Yahoo, Essence, The Knot, PopSugar and Parents.com. Elizabeth has also done extensive spokesperson work and appeared on multiple renowned national networks like Good Morning America, ABC, NBC, and Fox to discuss money. Published in Writer + more + more
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23 years of experience Expertise Personal Finance Budgeting Taxes Retirement Underrepresented communitiesPamela de la Fuente is a managing editor of NerdWallet's personal finance content. She leads budgeting, money-making, consumer credit and and debt coverage.
Pamela de la Fuente is a managing editor of NerdWallet's personal finance content. She leads budgeting, money-making, consumer credit and and debt coverage.Ask her and her talented team about why credit scores matter, how to save money on your grocery bill, finding the right side hustle, how to protect your identity for free and more.
Ask her and her talented team about why credit scores matter, how to save money on your grocery bill, finding the right side hustle, how to protect your identity for free and more.Previously, she led taxes and retirement coverage at NerdWallet.
Previously, she led taxes and retirement coverage at NerdWallet.Pamela joined NerdWallet after working at companies including Hallmark Cards, Sprint Corp. and The Kansas City Star. She has been a writer and editor for more than 20 years.
Pamela joined NerdWallet after working at companies including Hallmark Cards, Sprint Corp. and The Kansas City Star. She has been a writer and editor for more than 20 years.Pamela is a thought leader in content diversity, equity, inclusion and belonging, and finds ways to make every piece of content conversational and accessible to all.
Pamela is a thought leader in content diversity, equity, inclusion and belonging, and finds ways to make every piece of content conversational and accessible to all.She is a graduate of the Maynard Institute's Maynard 200 program, and the National Association of Black Journalists Executive Leadership Academy. She is a two-time winner of the Kansas City Association of Black Journalists' President's Award. She was also founding co-chair of NerdWallet's Nerds of Color employee resource group.
She is a graduate of the Maynard Institute's Maynard 200 program, and the National Association of Black Journalists Executive Leadership Academy. She is a two-time winner of the Kansas City Association of Black Journalists' President's Award. She was also founding co-chair of NerdWallet's Nerds of Color employee resource group. Managing Editor + more + moreMost people are familiar with the stock market, which is where investors and traders buy or sell shares of company stock. Stock market performance is frequently used as a measure of the overall health of the economy.
Most people are familiar with the stock market, which is where investors and traders buy or sell shares of company stock. Stock market performance is frequently used as a measure of the overall health of the economy.But there are other fairly active markets that far fewer people know about, much less engage in: Over-the-counter, or OTC, markets. These are decentralized financial markets where two parties trade financial instruments using a broker-dealer. Among assets traded in the over-the-counter market are unlisted stocks. When a company is unlisted, it is public and can sell stocks, just not on a stock market exchange such as Nasdaq or the New York Stock Exchange.
But there are other fairly active markets that far fewer people know about, much less engage in: Over-the-counter, or OTC, markets. These are decentralized financial markets where two parties trade financial instruments using a broker-dealer. Among assets traded in the over-the-counter market are unlisted stocks. When a company is unlisted, it is public and can sell stocks, just not on a stock market exchange such as Nasdaq or the New York Stock Exchange.“The OTC market is essentially just a lower-tier marketplace for smaller companies that trade less often, don't make as much, their prices are lower, [and] their volumes are typically lower,” says Randy Frederick, managing director of trading and derivatives at Schwab Center for Financial Research based in Austin, Texas.
“The OTC market is essentially just a lower-tier marketplace for smaller companies that trade less often, don't make as much, their prices are lower, [and] their volumes are typically lower,” says Randy Frederick, managing director of trading and derivatives at Schwab Center for Financial Research based in Austin, Texas.Sound risky? It can be, but some investors see the potential upside — namely, that they could get first dibs on hidden gems. There are benefits for the stocks that are traded over the counter, too.
Sound risky? It can be, but some investors see the potential upside — namely, that they could get first dibs on hidden gems. There are benefits for the stocks that are traded over the counter, too.Brokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
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.
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.Or maybe the company can’t afford or doesn't want to pay the listing fees of major exchanges. Whatever the case, the company could sell its stock on the over-the-counter market instead, and it would be selling "unlisted stock" or OTC securities.
Or maybe the company can’t afford or doesn't want to pay the listing fees of major exchanges. Whatever the case, the company could sell its stock on the over-the-counter market instead, and it would be selling "unlisted stock" or OTC securities.Types of OTC securities
Types of OTC securitiesAssets traded on the over-the-counter markets include:
Assets traded on the over-the-counter markets include: Stocks . Bonds .Currencies.
Currencies.Derivatives, such as options, forwards and futures.
Derivatives, such as options , forwards and futures. Certificates of deposit .American depositary receipts, or ADRs, which are bank certificates that represent a specific number of shares of a foreign stock
American depositary receipts, or ADRs, which are bank certificates that represent a specific number of shares of a foreign stockWhere the OTC Markets Group comes in
Where the OTC Markets Group comes inThe OTC Markets Group is a tiered electronic system used by broker-dealers to publish prices for OTC securities. It is a common way for OTC securities to trade. The tiers of the OTC Markets Group include:
The OTC Markets Group is a tiered electronic system used by broker-dealers to publish prices for OTC securities. It is a common way for OTC securities to trade. The tiers of the OTC Markets Group include:The OTCQX Best Market
The OTCQX Best MarketThe OTCQB Venture Market
The OTCQB Venture MarketThe OTCID Basic Market
The OTCID Basic MarketThe Pink Limited Market
The Pink Limited MarketThe OTC Markets Group has eligibility requirements that securities must meet if they want to be listed on its system for each tier, similar to security exchanges. For instance, to be listed on the Best Market or the Venture Market, companies have to provide certain financial information, and disclosures must be current.
The OTC Markets Group has eligibility requirements that securities must meet if they want to be listed on its system for each tier, similar to security exchanges. For instance, to be listed on the Best Market or the Venture Market, companies have to provide certain financial information, and disclosures must be current.The quality of the investments — and specifically, the amount of information known about them and the requirements enforced — essentially goes in order. The Best Market (also known as OTCQX) is what it sounds like — the companies listed here are generally established, and they meet The OTC Markets Group's highest financial standards
The quality of the investments — and specifically, the amount of information known about them and the requirements enforced — essentially goes in order. The Best Market (also known as OTCQX) is what it sounds like — the companies listed here are generally established, and they meet The OTC Markets Group's highest financial standards OTC Markets Group. The Market for Leading Companies. Accessed Jan 16, 2026. .Penny stocks — which are sometimes called pink sheets — are known for being traded OTC. They aren't available through every brokerage account, are generally considered quite risky and, in addition to their OTC status, are often defined as stocks that trade for less than $5 per share. They are generally traded through the Pink Limited market.
Penny stocks — which are sometimes called pink sheets — are known for being traded OTC. They aren't available through every brokerage account, are generally considered quite risky and, in addition to their OTC status, are often defined as stocks that trade for less than $5 per share. They are generally traded through the Pink Limited market.“Once you get down to the very bottom level, the pink sheets, then there's obviously a lot of risk there because not only do you have the stock potentially like a penny stock — very, very cheap — but because of the minimum requirements for disclosures and reporting. There's a possibility that there could be fraud at the very lowest level of the pink sheet market,” Frederick says.
“Once you get down to the very bottom level, the pink sheets, then there's obviously a lot of risk there because not only do you have the stock potentially like a penny stock — very, very cheap — but because of the minimum requirements for disclosures and reporting. There's a possibility that there could be fraud at the very lowest level of the pink sheet market,” Frederick says.This tiered marketplace can be used as a benchmark or guide for investors so they’re aware of how much risk they're taking.
This tiered marketplace can be used as a benchmark or guide for investors so they’re aware of how much risk they're taking.» Dive deeper: What are penny stocks?
» » Dive deeper: Dive deeper: What are penny stocks?How to buy securities on the OTC markets
How to buy securities on the OTC marketsBuying OTC securities is pretty straightforward because they trade like most other stocks, said Romy Pickron, a certified financial planner located in Dallas. Here’s her step-by-step guidance:
Buying OTC securities is pretty straightforward because they trade like most other stocks, said Romy Pickron, a certified financial planner located in Dallas. Here’s her step-by-step guidance:1. Do your due diligence and find a broker that allows OTC trading, then research the industry or security you’re interested in. NerdWallet has a shortlist of the best brokers for OTC/penny stock trading.
1. Do your due diligence 1. Do your due diligence and find a broker that allows OTC trading, then research the industry or security you’re interested in. NerdWallet has a shortlist of the best brokers for OTC/penny stock trading .2. Find the ticker symbol for the security. Contact your broker directly if you cannot find the information you are seeking. As a buyer and seller of OTC securities, you may have to obtain an additional level of approval prior to trading from your broker-dealer due to the higher level of risk associated with these securities.
2. Find the ticker symbol for the security. 2. Find the ticker symbol for the security. Contact your broker directly if you cannot find the information you are seeking. As a buyer and seller of OTC securities, you may have to obtain an additional level of approval prior to trading from your broker-dealer due to the higher level of risk associated with these securities.3. Determine how much you want to invest. OTC markets are most suitable for investors who are comfortable with risk, and/or interested in diversifying their portfolios through access to foreign markets, says Pickron.
3. Determine how much you want to invest. 3. Determine how much you want to invest. OTC markets are most suitable for investors who are comfortable with risk, and/or interested in diversifying their portfolios through access to foreign markets, says Pickron.4. Purchase your OTC security through a broker. Consider placing a limit order, due to the possibility of lower liquidity and wider spreads. Lower liquidity means the market may have fewer shares available to buy or sell, making the asset more difficult to trade. When there is a wider spread, there is a greater price difference between the highest offered purchase price (bid) and the lowest offered sale price (ask). Placing a limit order gives the trader more control over the execution price.
4. Purchase your OTC security through a broker. 4. Purchase your OTC security through a broker. Consider placing a limit order , due to the possibility of lower liquidity and wider spreads. Lower liquidity means the market may have fewer shares available to buy or sell, making the asset more difficult to trade. When there is a wider spread, there is a greater price difference between the highest offered purchase price (bid) and the lowest offered sale price (ask). Placing a limit order gives the trader more control over the execution price.» Learn more: What is a broker and why do I need one?
» Learn more: » Learn more: What is a broker and why do I need one?Before purchasing an OTC security, you can use the OTC Market Group website to see which of the tiers the security falls into
Before purchasing an OTC security, you can use the OTC Market Group website to see which of the tiers the security falls into OTC Market Group. OTC Markets . Accessed Oct 17, 2024. .OTC markets vs. exchanges
OTC markets vs. exchangesThe main difference between OTC markets and exchanges is that exchanges are centralized, they publicly list stock prices and have government oversight. OTC markets are decentralized; they are networks of trading relationships centered around broker-dealers and have less regulation. This means OTC markets can be riskier and more prone to fraud
The main difference between OTC markets and exchanges is that exchanges are centralized, they publicly list stock prices and have government oversight. OTC markets are decentralized; they are networks of trading relationships centered around broker-dealers and have less regulation. This means OTC markets can be riskier and more prone to fraud IMF. Markets: Exchange or Over-the-Counter. Accessed Oct 17, 2024. .Another notable difference between the two is that on an exchange, supply and demand determine the price of the assets. In OTC markets, the broker-dealer determines the security’s price, which means less transparency.
Another notable difference between the two is that on an exchange, supply and demand determine the price of the assets. In OTC markets, the broker-dealer determines the security’s price, which means less transparency.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.
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.“Because there's less regulation, they're known to be targets of market manipulation, where prices can be manipulated. It involves a lot of risk because you're typically buying less reputable securities. So there's always the potential for negative returns,” she says.
“Because there's less regulation, they're known to be targets of market manipulation, where prices can be manipulated. It involves a lot of risk because you're typically buying less reputable securities. So there's always the potential for negative returns,” she says.There are benefits of OTC securities, but consider the risks involved, and decide whether they align with your financial goals. OTC markets provide opportunities for bigger moves, but because of reduced regulation, the reverse could also happen, Soscia says.
There are benefits of OTC securities, but consider the risks involved, and decide whether they align with your financial goals. OTC markets provide opportunities for bigger moves, but because of reduced regulation, the reverse could also happen, Soscia says.“It may be easier to double your money faster, but that can also be a con because it would be easier to lose all your money faster as well."
“It may be easier to double your money faster, but that can also be a con because it would be easier to lose all your money faster as well." ADEarn 3.71% APY by investing in U.S. Treasury Bills*
Earn 3.71 % APY by investing in U.S. Treasury Bills* Maximize your cash by investing in low-risk, government-backed T-Bills. All the work is done for you — just make the deposit and watch your money grow. Learn More *Rate when held to maturity. Rate shown is subject to price fluctuations.Helpful resources
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