OTC Stocks Trading - Bilateral Contract in Off-Exchange Market
OTC stocks market offers trading financial instruments directly between two parties which agree on how a particular trade is to be settled in the future.
OTC stocks markets (Over-The-Counter or off-exchange market) offers trading financial instruments such as stocks, bonds, commodities or derivatives directly between two parties in a form of bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly and is mostly done via the computer or the telephone. OTC stocks' trading is contrasted with exchange trading, which occurs via central facilities constructed for the purpose of trading, such as futures exchanges or stock exchanges.
In the U.S., OTC stocks trading is carried out by market makers that make markets in OTCBB and Pink Sheets securities using inter-dealer quotation services such as Pink Quote (operated by Pink OTC Markets) and the OTC Bulletin Board (OTCBB). OTC securities are usually not listed nor traded on any stock exchanges, though exchange listed stocks can be traded OTC on the third market.
Although stocks quoted on the OTCBB must comply with U.S. Securities and Exchange Commission (SEC) reporting requirements, other OTC securities, such as those stocks categorized as Pink Sheets securities, have no reporting requirements.
According to data provided by Pink Sheets, there are total 5,149 stocks trading over-the-counter; 5,019 securities quoted exclusively on Pink Sheets and 130 securities quoted exclusively on OTCBB (3,445 securities dually quoted on Pink Sheets and OTCBB).
OTCBB - OTC Bulletin Board
The Over-The-Counter Bulletin Board (OTCBB) is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. OTC securities are generally not listed or traded on NASDAQ or a national securities exchange. OTCBB securities include national, regional, and foreign equity issues, warrants, units, American Depositary Receipts (ADRs), and Direct Participation Programs (DPPs).
The OTCBB began operation in 1990 on a pilot basis, as part of important market structure reforms to provide transparency in the OTC stocks market. An electronic system was designed to facilitate the widespread publication of quotation and last-sale information. Since 1993, firms have been required to report trades in all domestic OTC equity securities within 90 seconds of the transaction.
In 1997, the SEC approved the operation of the OTCBB on a permanent basis. In 1998, all foreign securities and ADRs that are fully registered with the SEC became eligible for the display of real-time quotes, last-sale prices, and volume information on the OTCBB.
The SEC approved the OTCBB Eligibility Rule in 1999. Securities not quoted on the OTCBB as of that year are required to report their current financial information to the SEC, banking, or insurance regulators in order to meet eligibility requirements. Non-reporting companies whose securities were already quoted on the OTCBB were granted a grace period to comply with the new requirements. Current financial information about all domestic companies that are quoted on the OTCBB is today publicly available.
The OTCBB today (06-20-2010) provides access to 3,445 securities and it includes more than 230 participating Market Makers. Real-time quotes, price, and volume information in domestic securities, foreign securities and ADRs is transmitted electronically and it displays indications of interest and prior-day trading activity in DPPs.
OTC Trading Risks
Although investing in OTC securities seems very simple, they are riskier than stocks listed on exchanges. OTC stocks are often from companies that are extremely small, with markets caps around $50 million or smaller. These companies offer very little information, which may be difficult to find, and they are extremely illiquid which can make it hard to find a buyer.
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