These can be options, forwards, futures, or other agreements whose value is based on that of an underlying asset, like a stock. Derivatives, private contracts between two parties, typically arranged by a broker.OTC markets are a better fit for bonds than stock exchanges because of the large size of trades, number of bonds traded, and the infrequent trading of bonds.īesides stocks and bonds, investments that trade OTC often include: Most bonds trade OTC after their initial offering. Fast fact: More than 10,000 securities trade OTC. NASDAQ, for example, charges companies up to $163,000 to be listed, assuming they qualify. Other OTC companies are larger, but can't afford (or don't want to pay) the listing fees the major exchanges charge. Often referred to as penny stocks, they trade for less than $5 per share. Many OTC securities include stocks issued by small companies that don't qualify to be listed on major exchanges because they don't trade enough shares or their shares don't sell above a minimum price. Broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA). In fact, SEC regulations were updated in September 2020 to enhance disclosure and investor protections by ensuring that broker-dealers do not publish price quotes for a security when current information about that security is not publicly available.Īlso, OTC trading is usually done through a licensed broker-dealer. Many OTC stocks are subject to at least some oversight by the SEC. That said, there are still federal regulatory hoops to jump through. No governing institution is watching them, in other words. So these equities are subject to the rules and requirements that these exchanges impose on their listed companies. This means their stock can be openly bought and sold, but that the stock is not listed on a major exchange such as the NYSE or Nasdaq. A price for a stock is posted (the "ask"), and then investors make offers for it, bidding against each other.Ĭompanies that trade OTC are considered public but unlisted. In contrast, stock exchanges are auction markets. They are known as dealer networks or markets. OTC markets are electronic networks that allow two parties to trade with each other using a dealer-broker as a middleman.
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