Over The Counter Stocks - Definition and Overview

By definition over the counter stocks are stocks that are traded through broker dealers not through centralized stock exchanges. Simply all stocks which are traded outside major stock exchanges like Nasdaq and NYSE are considered as Over-The-Counter (OTC) stocks. Attention that although Nasdaq work as a system of broker dealers connected with a central computer it is not considered as an OTC market, even though some claim so. The two major over the counter stock trading markets are Over the Counter Bulletin Board (OTCBB) and Pink Sheet. The companies, of which stocks are traded OTC, may be new companies, small/growing companies unable to meet minimum requirements of major stock markets or companies delisted from major stock markets (also known as unlisted). The stocks from these companies are usually known as penny stocks or as micro cap stocks. Remember that OTC market also trades government & municipal securities, corporate bonds, asset-backed securities and mortgage backed securities. As said earlier, over the counter stock trades are done via direct interactions between brokers and market makers either through phone or computer network. The market makers are the holders of OTC stocks, who on demand sell them to the brokers. The price of the stocks are determined by negotiation between the market maker and broker through a process of ask and bid, not as auction bidding as in the stock exchange floor. So a trader want to trade OTC stocks must first open a trading account from one broker, either discount or full service, offering OTC trading service. Then he/she can place her order through the broker. Today there are also some online stock brokers who allow traders to interact directly with the market makers. OTCBB and Pink Sheet market differs in their listing requirements. OTCBB market demands some minimum requirements from companies to list and remain in the market. These requirements are somewhat easier to maintain than the NYSE requirements. On the other hand Pink Sheet market does not need any minimum requirements to be listed. This easy in listing makes both of these markets vulnerable to trade. The companies listed may not have proper financial background and history; in fact, many companies delisted from major exchanges can be on the verge of bankruptcy.

OTC stock trades involve more the chance of loss than profit. It is a market known for frauds and for its volatility. Some problems that OTC markets have involves no/easy minimum requirements making bad companies to be listed, serious lack of company information like financial history & present status, low liquidity making selling of purchased securities difficult, price manipulation on certain stocks by brokers, and cheating advertisements through all sorts of media highlighting false advantages of company/broker/market. Even though with all these demerits, over the counter stock trading is increasing its popularity. The new advancements in information technology and tracking methods improved availability of company and market information. Also a number of companies listed in these markets are growing speedily to make their way into large stock exchanges. On a recent trend, many companies qualified from OTCBB for large markets have chosen to remain in over the counter trading, as they believe is the perfect trading method for them. This increased the reliability of the market. The rules enforced by National Association of Securities Dealers (NASD) also contributed on that.