Over-the-counter (OTC) refers to trading securities outside official stock exchanges; Nasdaq, for example. A wide range of securities can be traded over-the-counter, including common stocks, American Depository Receipts (ADRs), and even derivatives. ADRs refers to securities issued by a bank representing shares in a non-U.S. company.
Many companies choose to trade their shares over-the-counter because they cannot meet the listing requirements of official security exchanges. Another possible reason is that they are not willing to (or cannot) afford the listing fees of exchanges.
The OTC market provides investors opportunities to trade securities outside official exchanges. Investors can add stocks already listed in another country to their portfolio. With varying asset requirements and relatively low listing fees, the OTC market offers a place for large groups of unlisted companies to trade.
Tiers of OTC Markets
Securities trading in the OTC markets are mainly divided into three markets—the OTCQX, OTCQB, and OTC Pink, all provided by the OTC Market Group. The OTCQX market ranks the first in high listing requirements, OTCQB the second. OTC Pink has no formal listing requirements. See below for a brief comparison.
Companies already listed on an international exchange
(Not penny stocks, shell company, or in bankruptcy).
Asset requirements; Current regulatory disclosures.
Qualified smaller and growth companies (Not penny
stocks, shell company, or in bankruptcy).
Asset requirements; Current regulatory disclosures; Bid test.
Entrepreneurial and development stage U.S. and
international companies (Not in bankruptcy).
Current regulatory disclosures; Bid test.
Companies of all development stages, including penny
stocks, shell companies, and companies in bankruptcy.
Low disclosure requirements.