What are Over-the-Counter (OTC) stocks?

This article focuses on OTC securities, however, it is not a recommendation to invest in them and should not be taken as financial advice. Do your own research and make your own decisions, or even consider getting advice from a licensed financial adviser before investing.

What is the Over-the-Counter (OTC) market?

The over-the-counter (OTC) market is a decentralised market where participants trade securities via a broker-dealer network without the involvement of a broker or central stock exchanges, like the New York Stock Exchange (NYSE) or Nasdaq.

Unlike an auction market system, OTC markets do not have physical locations, and trading is conducted electronically. In OTC markets, dealers act as market-makers by quoting prices at which they will buy and sell financial products, and transactions can be executed without others being aware of the price at which the trade was completed. OTC markets are typically less transparent than exchanges and are subject to fewer regulations, which may result in liquidity coming at a premium.

If a company does not meet the requirements to list on a normal exchange, its securities can be traded via OTC markets, but may still be subject to some regulation by the SEC (relevant to U.S. securities only).

What are OTC stocks?

Stocks that trade via Over-the-Counter markets are known as OTC stocks or sometimes referred to as unlisted stocks. There are a variety of OTC stocks available, and some of these non-exchange-listed stocks include multi-billion dollar global companies like Adidas ($ADDYY) and Nintendo ($NTDOY).

Examples of over-the-counter securities

Stocks are one of the most commonly traded over-the-counter products but there are other financial instruments available to invest in with OTC markets.

• American Depositary Receipts (ADRs)

• Bonds

• Derivatives

• Foreign currency

Stocks and ADRs are the main securities available to invest over-the-counter on Stake.

What OTC markets are available?

A company called the OTC Markets Group runs the most commonly used networks where over-the-counter trading takes place. Even though they do not operate like a formal exchange, there are still eligibility requirements that need to be met, outlined by the SEC (relevant to U.S. securities only).

Financial products, such as shares, are traded through broker-dealer networks. Using an electronic system, scores of broker-dealers are posting stocks on offer. Trades are executed directly between the buyer and seller without the need for a third-party exchange to settle transactions. The Financial Industry Regulatory Authority (FINRA) is actively regulating U.S. broker-dealers that are operating in the U.S. OTC markets.

OTCQX

OTCQX has the most stringent reporting requirements and is the home to multi-billion dollar foreign companies. The majority of OTC stocks available on Stake fall into the OTCQX category, although only 4% of OTC stocks are in this tier. Stocks under US$5 in price are also ineligible for OTCQX trading.

This market includes some U.S. companies that plan to list on Nasdaq or NYSE in the future and foreign companies that are already listed on foreign exchanges.

OTCQB

OTCQB, often called the "venture market", sits in the middle tier, with companies that tend to be early-stage or developing.

Pink Open Market

While pink sheets may have a bad image, some legitimate companies like Nintendo fit into the category, however, shell companies and businesses with no real operations can be listed here. Such companies don’t have to report to the U.S. Securities and Exchange Commission (SEC). U.S. regulators may not monitor such stocks, but foreign regulators may.

Pros and cons of investing in OTC stocks

With all investments, there is a degree of risk that needs to be considered before putting your money in. Here are some general guidelines on the pros and cons of trading OTC securities:

Pros of OTC markets

• Some major global companies are traded over the counter, such as Adidas, LVMH and Nintendo.

• Access to a wider range of investment opportunities that are not listed on traditional exchanges.

• Greater flexibility in trading as OTC markets are open 24/7 and do not have the same trading hours as traditional exchanges.

• Potential for higher returns as many small-cap companies and emerging markets are traded in the OTC market.

Cons of OTC markets

• Lack of transparency and regulation, making it easier for fraudulent schemes to go undetected.

• Higher risk due to the lack of liquidity and lower trading volumes, which can lead to greater volatility and wider bid-ask spreads.

• Difficulty in finding reliable information on OTC stocks as they are often not covered by analysts or mainstream financial news sources.

• Counterparty risk as OTC trades are conducted directly between parties, which can be a concern if one of the parties defaults on their obligation.

The SEC provides more details of things to be aware of when trading in the over-the-counter markets.

How to buy OTC stocks in Australia?

1. Open a stock investing account: To buy OTC securities, you'll need to sign up to a platform with access to the OTC marketplace. Lucky for you Stake has access to over 100 OTC companies.
2. Fund your account: Complete an application with your personal and financial details. Fund your account with a bank transfer, debit card or even Apple/Google pay.
3. Search for the OTC stock: Find the share by searching for the name or ticker symbol. Do your own research to ensure it is the right investment product for your own circumstances and read the OTC risk disclosures. For a list of the OTC stocks available on Stake, see below.
4. Place a limit order and buy the shares: When placing a trade on the OTC market, limit order will be pre selected for you. This will delay your purchase of the shares until it reaches your desired stock price. One type of investment strategy is dollar cost averaging which can spread out your risk as it smooths out buying at consistent intervals. Market and stop orders are not available for OTC stocks.
5. Monitor your investment: Optimise your portfolio by tracking how your stock and the business perform with an eye on the long term. You may be eligible for dividends and shareholder voting rights that affect your stock.

View the OTC Securities Disclosure from DriveWealth here.

List of OTC stocks available on Stake

This list may be subject to change.

OTC stocks FAQs

Why would a company list on OTC markets?

Next, why would a company go OTC rather than on an exchange? In short, listing on an exchange is difficult and costly. For smaller companies, the millions needed to both list then comply with the yearly SEC and FINRA audits prices them out of the major exchanges. 

For bigger companies, like the OTC stocks found on Stake, they are generally foreign ADRs. These companies are already listed on a local market and an OTC listing provides an easier option for foreign investors to access the stock.

How many stocks are available in the OTC markets?

According to OTC Markets Group, there are over 12,000 U.S. and global securities listed.

What is the 'Grey Market'?

The Grey Market is where all other over-the-counter securities are traded. These securities are not quoted by broker-dealers due to reasons such as lack of investor interest, insufficient financial information, or inadequate regulatory compliance.