Over-The-Counter (OTC)
A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. Investopedia Says:
In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.
Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records.
Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the bank that makes the market in that bond and asks for quotes. Related Terms:
American Stock Exchange - AMEX
Derivative
Nasdaq
National Association of Securities Dealers - NASD
New York Stock Exchange - NYSE
Over-The-Counter Bulletin Board -OTCBB
Penny Stock
Pink Sheets
Toronto Stock Exchange - TSX
Unlisted Security Over-The-Counter Market
A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor. There is no central exchange or meeting place for this market.
Also referred to as the "OTC market". Investopedia Says:
In the OTC market, trading occurs via a network of middlemen, called dealers, who carry inventories of securities to facilitate the buy and sell orders of investors, rather than providing the order matchmaking service seen in specialist exchanges such as the NYSE. Related Terms:
Dealer
Dealer Market
Electronic Communication Network - ECN
Nasdaq
New York Stock Exchange - NYSE
Over the Counter Bulletin Board - OTCBB
Over-The-Counter - OTC
Penny Stock
Specialist
Unlisted Security |