The security’s price isn’t listed publicly as it would be on an exchange regulated by the Securities and Exchange Commission, says Brianne Soscia, a CFP from Wealth Consulting Group based in Las Vegas. There’s a possibility that there could be fraud at the very lowest level of the pink sheet market,” he says. The OTC Markets Group has eligibility requirements that securities must meet if they want to be listed on its system, similar to security exchanges. For instance, to be listed on the Best Market or the Venture Market, companies have to provide certain financial information, and disclosures must be current. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

OTC markets do present additional risks to investors compared to major exchanges. Securities on OTC markets tend to be more volatile and thinly traded. It may also be more difficult to buy and sell securities, and bid-ask spreads are often wider. OTC markets in the U.S. are regulated by the Securities and Exchange Commission (SEC). However, the securities traded on OTC markets are not subject to the same strict listing standards as major exchanges.

Understanding the three different OTC market tiers can help you evaluate the risk of a particular stock and gauge the stock’s regulatory oversight and liquidity. When trading stocks on the OTC market, be sure to look for classifications by The OTC Markets Group that may provide additional information about a company’s regulatory status. Investors are familiar with trading on an exchange such as the NYSE or Nasdaq, with regular financial reports and relatively liquid shares that can be bought and sold.

1. But the added risk of trading in the OTC markets is a consideration for any prudent investor.
2. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.
3. They are also usually less liquid, making them difficult to trade and subject to market manipulation.
4. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products.

Sometimes a company doesn’t meet the listing requirements for major exchanges. Or they might meet listing requirements, but management doesn’t want to pay listing fees. Sketchy companies stay off the listed exchanges to avoid scrutiny and regulation.

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The stock has not traded for 30 days, and the last sale was $15.75, and the current market is $9 bid and $27 offered, with only 1,500 shares to buy and 7,500 for sale. At this point, the PM needs to decide if they want to try to sell the stock and find a buyer at lower prices or place a limit order at the stock’s last sale with the hope of getting lucky. In addition to the decentralized nature of the OTC market, a key difference is the amount of information that companies make available to investors. Since most penny stocks have a low number of shares traded each day (low liquidity), prices are easy to manipulate. This makes penny stocks prime candidates for pump and dump investment schemes.

Bonds

The lack of liquidity could make it difficult to sell in the future. That said, the OTC market is also home to many American Depository Receipts (ADRs), which let investors buy shares of foreign companies. The fact that ADRs are traded over the counter doesn’t make the companies riskier for investment purposes. For example, penny stocks are traded in the over-the-counter market, and are notorious for being highly risky and subject to scams and big losses.

Examples of over-the-counter securities

Companies in this category do not make current information available via OTC Markets disclosure and news service, or if they do, the available information is older than six months. This category includes defunct companies that have ceased operations as well as “dark” companies with questionable management and market disclosure practices. Securities of publicly traded companies that are not willing to provide information to investors are considered highly risky. Quotations for stocks in this tier are hidden from the public. Pink is an open market that has low financial standards or reporting requirements. The stock of companies in the Pink tier are not required to be registered with the SEC.

Definition and Examples of the Over-the-Counter Market

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However, individual investors also own many of the low-priced OTC penny stocks. The OTC markets serve important purposes for trading bonds, ADRs, derivatives and shares of smaller companies. But the added risk of trading in the OTC markets is a consideration for any prudent investor. The process of purchasing or selling over-the-counter (OTC) stocks can be different from trading stocks listed on the New York Stock Exchange (NYSE) or the Nasdaq. This is because OTC stocks are, by definition, not listed on the exchange. Purchases of OTC securities are made through market makers who carry an inventory of stocks and bonds that they make available directly to buyers.

“Because there’s less regulation, they’re known to be targets of market manipulation where prices can be manipulated. It involves a lot of risk because you’re buying typically less reputable securities. So there’s always the potential for negative returns,” she says. Another notable difference between the two is that on an exchange, supply and demand determine the price of the assets.

Other OTC markets

There is no government-mandated minimum to buy penny stocks, and many U.S. brokers do not have account minimums to open an account or execute a trade. Some brokers, however, may not permit penny stock trading as a matter of policy or because local businesses hiring near me you do not meet that broker’s financial requirements. Securities and Exchange Commission, or SEC, “penny stock” generally refers to a security issued by a very small company (i.e., micro-cap) that trades at less than $5 per share.