Otc Markets Meaning Top 4 Over The Counter Market Group

OTC Markets Meaning

OTC Markets Functioning

The Over-the-counter (OTC) market is a decentralized market. It does not have a central physical location. The trade and communication between the parties involved occur through various modes such as email, telephone, and proprietary electronic trading systems.

The prices are dependent on the supply and demand in the market. The parties involved buy and sell securities at certain prices with or without the help of broker-dealers who provide liquidity by trading for their account, matching orders internally, publishing quotes, and executing with external broker-dealers. The price of securities and other non-financial instruments are affected by the availability of information about the number and volume of orders (i.e., the liquidity of underlying stock) and the timing of buy and sell orders.

All the brokers and dealers involved in over-the-counter trading in the United States must register with the Financial Industry Regulatory Authority, Inc.(FINRA). Retail investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more should execute their transactions (buy and sell orders) in OTCQX, OTCQB, and Pink securities with the help of a FINRA-registered broker-dealer.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: OTC Markets (Over The Counter) (wallstreetmojo.com)

OTC Markets Group

Formerly, over-the-counter trading was referred to as “pink sheetPink SheetPink sheets are stocks that cannot be traded on exchanges such as NYSE/NASDAQ for a variety of reasons, including a lack of sufficient capital to go public, lack of economic justification for going public given the small amount of capital they intend to raise, or a strategic decision not to go public due to the scrutiny that the regulatory boards place on them.read more” trading. But these old pink sheets have been re-categorized by the OTC Markets Group into the present-day OTC Pink, OTCQB, and OTCQX.

#1 – OTC Pink

The pink open market, also called OTC pink sheets, is the most unregulated and open platform of all trading marketplaces. It does not lay any rules for the companies to get listed here, and also, the companies need not file with the Securities Exchange Commission. The only requirement is to obtain quotes from a broker-dealer registered with the FIRA.

The features mentioned above of an OTC pink marketplace provide a trading platform for domestic or foreign companies that limit their disclosure in the U.S., penny stocksPenny StocksPenny Stock refers stocks of public companies that trade at a very low price, typically less than $5 per share and are highly illiquid. Usually, these stocks belong to small and newbie companies with a low market capitalization.read more, and distressed, delinquent companies not willing or able to provide information to potential investors.

Therefore, the investors need to be professional and highly sophisticated with a high-risk tolerance for trading in companies with limited information available to the public. Also, due to the limited regulatory oversight, it is strongly recommended that the investors proceed with great caution and thoroughly research the listed OTC pink companies they are interested in before making any investment decisions.

#2 – OTCQB

OTCQB, which hosts the Venture Market, is the second tier of the OTC Market Group. The listed companies are generally small and in the growth phase of their life cycle. Companies that start trading in the OTCQB marketplace are subject to a set of regulations. The requirement to fulfill a minimum set of standards reduces the possibility of Penny stock companies and fraudulent corporations from getting listed in the QTCQB marketplace.

The companies trading here are open-natured and less transparent than their established counterparts, so this poses a threat to the investors who conduct trades without investment acumen. Therefore, investors are advised to be diligent when investing their capital in the companies listed on the QTCQB marketplace.

#3 – OTCQX

The OTCQX, the highest tier in the OTC Market Group, includes multinational corporations, stocks of blue-chip companiesBlue-chip CompaniesBlue chip stocks are issued by companies possessing large market capitalization. Blue chip companies are market leaders. They provide good returns on stocks, offer dividends, and are considered safe investments.read more, and groups that must prove their integrity to investors. To get listed on the OTCQX, companies must go through stringent disclosure requirements. The companies of the OTCQX must fully comply with laws put forth by the US Securities Exchange Commission. These stringent policies safeguard the interests of the investors as penny stocks are excluded.

Although the listed companies undergo strict scrutiny, trades remain private. Due to the decentralized nature of the OTCQX, there is scope for speculative investments, and these investments are therefore considered to be a little risky. Despite the level of risk, many investors enjoy incredible returns in the OTCQX.

It is to be noted the amount of risk is far less than the other two marketplaces. Here, the companies would undergo verification similar to what they would face with a recognized stock exchange.

#4 – OTC Link

The OTC link is a service owned and operated by the OTC Markets Group and provides a link for traders and companies on each of the three marketplaces discussed above. OTC Link is a connection for any company looking to trade on an OTC Market Group network. Quotes, i.e., ask and bid pricesBid PricesBid Price is the highest amount that a buyer quotes against the “ask price” (quoted by a seller) to buy particular security, stock, or any financial instrument. read more, are obtained or published from a system maintained by the Over The Counter Markets group.

Advantages

OTC markets are decentralized, allowing for the free trade of securities between parties involved without the interference of outside parties.The traders in the OTC markets are free to set the prices, and the broker deals on their own.OTC provides access to securities or stock not available on stock exchanges.OTC markets impose fewer regulations.Penny stock companies and other small companies that don’t get listed on recognized stock exchanges can get listed in the OTC marketplace.The investors pay fewer trade costs so that they can achieve a significant level of return.

Disadvantages

There is a greater risk of fraud due to the lack of regulation.The prices of securities or other non-financial instruments are highly volatile.OTC markets pose a threat of low liquidity.There can be delays in finalizing the trade.OTC markets lack transparency.

In a nutshell, OTC trading is an unregulated form of a trading system that promotes equity and thereby helps investors in trading stocks that would otherwise not be available on stock exchanges.