O T C
Over The Counter Stock
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Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. There are no stock exchanges like NYSE, NASDAQ, etc. involved. That's why this kind of trading is called over-the-counter because that's what basically happens. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to exchange trading which occurs on futures exchanges or stock exchanges.
Although Nasdaq operates as a dealer network too, 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 so-called pink sheets.
An over-the-counter stock or contract is a bi-lateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement.
A stock is traded over the counter usually because the company is small and unable to meet listing requirements of the exchanges. As a result, very few over the counter stocks are successful in making the jump from this market to the NASDAQ or any other major exchange due to their inability to meet the listing requirements of the major exchanges. These stocks are then traded by brokers/dealers who negotiate directly with one another over computer networks and by phone.
These kind of securities are extremely risky though because there's no controling body or organisation like the SEC which oversees the securities industry and promotes full disclosure in order to protect the investing public against malpractices. That's why you should be very wary of OTC stocks because the OTCBB (Bulletin Board) stocks are either penny stocks or hold bad credit records.
OTC Bulletin Board
In the U.S., over-the-counter trading of stocks is carried out on the OTC Bulletin Board (OTCBB). The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information for various types of equity securities. The OTCBB was founded in 1990 and currently provides access to more than 3300 securities with over 230 market makers. It is not regulated as a stock exchange which makes an investment in an otc security so risky.
Ricky Schmidt
October 13, 2006
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