An over-the-counter market, or OTC market as it more commonly known, is a market in which shares are bought and sold directly between two parties and not traded in a recognized stock exchange. The term “over-the-counter” is derived from the original practice of buying shares over bank counters in the United States. It is a decentralized market that is not listed on an exchange and the trading is done via telephone or electronic network. There is no physical trading floor and no central exchange or meeting place for this market.
Each trade in an OTC market is an individual contract between 2 parties making the trade and the trading is facilitated by broker dealers.
Since they function outside of regular stock exchanges, OTC markets were not considered good investor protection, but they have been gaining more popularity and are becoming more formalized. The two major markets that deal in OTC stocks are Pink Sheets electronic market and Over-the-Counter Bulletin Board or OTCBB.
Pink Sheets is an electronic quotation system developed by Pink OTC Markets and provides quotes from broker-dealers for many OTC stocks. The name comes from the color of the paper on which stock quotes were traditionally printed. Now, it is done electronically. Companies do not need to meet any requirements to be listed on the Pink OTC market.
OTCBB is an electronic quotation system that displays last-sale prices, volume trading information and real-time quotes for OTC stocks and securities not listed in registered stock exchanges. Companies wanting to have their shares listed on OTCBB must file current financial reports with the U.S. Securities and Exchange Commission (SEC) or their banking or insurance regulators.
To trade in OTC stocks, investors need to open an account with a broker or a brokerage firm who will act on their behalf with the company listed on the OTC market.
OTC stock trading is increasing in popularity, with technological advancements making them easier to trade. The number of companies in the market is also growing as more and more companies enter the OTC markets.
