What Does OTC Mean | Trading Guides (2024)

The OTC market is arranged through brokers and dealers who negotiate directly. An advantage of the OTC market is that non-standard quantities of stock or shares can be traded.

The OTC market often includes smaller securities. It consists of stocks that do not need to meet market capitalisation requirements. OTC markets could also involve companies that cannot keep their stock above a certain price per share, or who are in bankruptcy filings. These types of companies are not able to trade on an exchange, but can trade on the OTC markets.

These are not the only types of companies on the OTC market, however. Larger, established companies normally tend to choose an exchange to list and trade their securities on. But well known, large companies trade OTC too. For example, blue-chip stocks​ Allianz, BASF and Roche and Danone are traded on the OTCQX market.

The over-the-counter market is a network of companies that serve as a market maker for certain inexpensive and low-traded stocks, such as UK penny stocks​. Stocks that trade on an exchange are called listed stocks, whereas stocks that are traded over the counter are referred to as unlisted stocks.

Although there are differences between OTC and major exchanges, investors shouldn’t experience any significant variations when trading. A financial exchange is a regulated, standardised market and could therefore be considered safer. It may also be seen as enabling faster transactions.

OTC markets and exchange markets are the two standard ways of organising financial markets. Stock trades must take place either through an exchange, or via the OTC market. However, some stocks trade on both an exchange and OTC.

Debt securities and other financial instruments, such as derivatives​​, are traded over the counter. Equities​ are also traded on the OTC market. Particular instruments such as bonds do not trade on a formal exchange – these also trade OTC by investment banks. OTC systems are used to trade unlisted stocks, examples of which include the OTCQX, OTCQB, and the OTC Pink marketplaces (previously the OTC Bulletin Board and Pink Sheets) in the US. These provide an electronic service that gives traders the latest quotes, prices and volume information.

How to trade bonds in the UK​ >

So how does a company make the jump to a major exchange? It must meet the new exchange’s financial and regulatory requirements. These include price per share, corporate profits, revenue, total value, trading volume and reporting requirements. Reports are filed and can be viewed by the public. Shareholders and the markets must be kept informed on a regular basis in a transparent manner about company fundamentals​.

The NYSE requires all its listed companies to have 1.1 million publicly held shares. These must be held by a minimum of 2,200 shareholders and the minimum share price must be $4.00. It also asks for an average monthly trading volume of 100,000 shares.

The company transitioning from OTC to a major exchange must be approved for listing by the relevant exchange. A completed application is necessary, along with various financial statements. This can include complete statements of shares outstanding and capital resources. A press release may have to be issued to notify shareholders of the decision. The fact that a company meets the quantitative initial listing standards does not always mean it will be approved for listing. The NYSE, for example, may deny a listing or apply more stringent criteria.

Once a company is listed with an exchange, providing it continues to meet the criteria, it will usually stay with that exchange for life. However, companies can also apply to move from one exchange to another. If accepted, the organisation will usually be asked to notify its previous exchange, in writing, of its intention to move. Despite the elaborate procedure of a stock being newly listed on an exchange, a new initial public offering​​ (IPO) is not carried out. Rather, the stock simply goes from being traded on the OTC market, to being traded on the exchange.

Following the move, a company’s stock symbol may change. Stocks that move from the OTC to NASDAQ often keep their symbol. This is because the OTC and NASDAQ both allow up to five letters. In contrast, NYSE regulations limit a stock’s symbol to three letters. Read more about trading duringstock market hours​.

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