What Is an OTC Stock?

An OTC stock, also known as an over-the-counter stock, is a stock that is not listed on a major stock exchange, such as the New York Stock Exchange (NYSE) or the Nasdaq Stock Market. Instead, OTC stocks are traded through a decentralized network of broker-dealers and market makers who facilitate trades between buyers and sellers.

OTC stocks are typically smaller and less well-established companies that may not meet the listing requirements of major exchanges. They may also be foreign companies that do not have a significant presence in the United States.

How Do OTC Stocks Work?

Trading in OTC stocks occurs through a network of market makers who maintain an inventory of these stocks and facilitate trades between buyers and sellers. Market makers are typically large financial institutions or broker-dealers who are willing to buy and sell OTC stocks on behalf of their clients. Investors can buy and sell OTC stocks through their broker-dealers, who will execute trades on their behalf.

In the United States, OTC stocks are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). However, the reporting and disclosure requirements for OTC stocks are less stringent than those for stocks listed on major exchanges.

Types of OTC Stocks

OTC stocks, also known as over-the-counter stocks, can be divided into several categories based on their characteristics. Here are some common types of OTC stocks:

• Penny stocks: These are stocks that trade for less than $5 per share and are often issued by small companies with low market capitalizations.
• Pink sheet stocks: These are stocks that do not meet the listing requirements of major exchanges and are therefore traded on the Pink Sheets, an electronic quotation system that displays bid and ask prices for OTC securities.
• OTCQX and OTCQB stocks: These are stocks that are traded on the OTC Markets Group’s electronic quotation system, which provides investors with access to financial data and company information.
• Foreign stocks: These are stocks issued by companies that are based outside of the United States and do not have a significant presence in the U.S. market.
• Unsponsored ADRs: These are American Depository Receipts (ADRs) that are issued by a U.S. bank but not sponsored by the foreign company that issued the underlying stock.
• OTC Grey Market stocks: These are securities that are not currently quoted on any OTC market or exchange, but may have traded in the past or may be actively traded in other markets.

Examples of OTC Stocks

Here are a few examples of OTC stocks:

• Penny stock: Amarantus Bioscience Holdings, Inc. (AMBS) is a biotechnology company that develops treatments for various diseases. The company’s stock trades on the OTC market under the ticker symbol AMBS.
• Pink sheet stock: Gritstone Oncology Inc. (GRTS) is a clinical-stage biotechnology company that focuses on developing cancer treatments. The company’s stock trades on the Pink Sheets under the ticker symbol GRTS.
• OTCQX and OTCQB stock: Nestle SA (NSRGF) is a Swiss multinational food and beverage company. Its stock trades on the OTCQX market under the ticker symbol NSRGF.
• Foreign stock: Tencent Holdings Ltd. (TCEHY) is a Chinese technology company that provides a variety of internet-related services. Its stock trades on the OTC market under the ticker symbol TCEHY.
• Unsponsored ADR: Volkswagen AG (VLKAF) is a German multinational automotive manufacturing company. Its unsponsored American Depository Receipts trade on the OTC market under the ticker symbol VLKAF.
• OTC Grey Market stock: Chinese e-commerce company Alibaba Group Holding Limited (BABA)’s shares were delisted from the New York Stock Exchange (NYSE) following regulatory pressures from the Chinese government in 2021. Following the delisting, BABA shares continued to trade in the over-the-counter (OTC) markets, including on the OTC grey market.

The Bottom Line

Because OTC stocks are not subject to the same regulatory requirements and oversight as stocks listed on major exchanges, they can be riskier investments. They may have lower liquidity, wider bid-ask spreads, and less publicly available information. As a result, investors should conduct thorough research and exercise caution when investing in OTC stocks.