Over the Counter

Over the Counter (OTC)

What Does Over the Counter (OTC) Mean?

A security traded off exchanges such as the NYSE, TSX, and AMEX. 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 explains Over the Counter (OTC)

In general, the reason a stock is traded over the counter is usually that the company is small, making it unable to meet the rigorous listing requirements of more traditional stock exchanges such as the New York Stock Exchange. Also known as unlisted stock, OTC 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 generally are not classified as OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally unlisted stocks that trade on the Over-the-Counter Bulletin Board (OTCBB) or on the pink sheets. One must be very wary of some OTC stocks; OTCBB stocks either are penny stocks or are offered by companies with bad credit records. Instruments such as bonds do not trade on a formal exchange and therefore also are considered OTC securities. Most debt instruments are traded by investment banks that make 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 ask for quotes.

Related Terms:
• Electronic Communications Network
• Nasdaq
• New York Stock Exchange—NYSE
• Over-the-Counter Bulletin Board—OTCBB
• Pink Sheets

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Over the Counter

The market for securities issued by companies usually not listed on any stock exchange. Over the counter (OTC) trading is the principal market for U.S. government and municipal bonds.