Over-the-Counter refers to much more than just the aspirin you buy at a convenience store. In investing, over-the-counter (or OTC) refers to a security traded outside of a formal exchange like the NYSE. Usually these stocks are traded via a dealer network rather than a formal stock exchange. Although Nasdaq operates like a dealer network, Nasdaq stocks are not generally considered to be OTC because Nasdaq is largely considered to be a stock exchange. Popular OTC networks include the OTCQX Best Market, the OTCQB Venture Market and the Pink Open Market.
OTC stocks are usually from small companies that do not meet the exchange listing requirements, which is why they may also be referred to as unlisted stocks. Instead, the securities are traded directly by broker dealers communicating via phone or computer. An inter-dealer quotation system, known as an OTC Bulletin Board, provides traders with information. Other types of OTC securities include American depository receipts, which represent equities on a foreign exchange, and many types of bonds.
In recent years, technology has improved the OTC process in terms of speed and information so that there is little material difference between trading on an OTC and a major exchange. The main difference is that exchanges ensure that every party is exposed to offers by every other counterparty, whereas dealer networks do not always have this feature. This may mean less transparency and regulation, meaning inexperienced investors must act with caution.
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