over-the-counter

What It Is

An over the counter security is traded through a dealer network rather than through a centralized, formal exchange (such as the NYSE, Nasdaq, or London Stock Exchange). Assets traded OTC are usually traded by private securities dealers who negotiate directly with buyers and sellers.

How It Works

The primary reason a stock is traded "over the counter" is because the company may be too small to meet the formal exchange listing requirements. OTC stocks may be referred to as "unlisted stocks" because they are traded privately through broker-dealers over the phone and computer networks.

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Instead of being listed on the NYSE or another formal exchange, OTC stocks are usually listed in the Over the Counter Bulletin Board (OTCBB) and/or on pink sheets. OTC stocks can sometimes be purchased through an online broker.

Bonds are considered over the counter because they are not traded on a formal exchange. To trade a bond, an investor must call the investment bank that the bond is traded through and ask for rates to perform the over the counter exchange.

Why It Matters

Over the counter securities are important because they offer investors alternatives to just investing in the listed companies on the NYSE and Nasdaq. It also gives investors an great opportunity to invest in stocks of small and/or overlooked companies that have plenty of growth potential.

Because most are not required to report to the SEC, many OTC stocks are either penny stocks or are offered by companies with bad credit records. But not all listed OTC traded companies have bad credit ratings; many companies simply don't want to participate in the expensive reporting process.  Because they are less highly regulated, potential investors should do a lot of research before diving into this type of asset.

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Source: Investing Answers