An over-the-counter stock is a stock option that is not listed on any of the organized stock exchanges, and therefore is not traded over those exchanges. Instead, stock of this type is bought and sold between brokers and dealers, usually using electronic technology to do so. In the United States, there are four common outlets where it is possible to sell and buy over-the-counter stock with the aid of a broker.
Two of the outlets where over-the-counter stock quotes and trading take place are associated with NASDAQ. Known as the national market and the smallcap market, these two venues focus on specific classes of stock options. Some financial professionals question if the national and smallcap markets should actually be identified as outlets for over-the-counter stock, since NASDAQ is considered to be a stock exchange as well as a dealer network. The national market deals with large stocks that are not traded on most other exchanges, with an emphasis on liquid stocks.
The smallcap market focuses on over-the-counter stock options that are issued by companies considered to be up-and-coming in their respective industries. Often, the stocks traded via this market are relatively unknown at present, but show great promise of becoming more prominent over time. Investors often look to the smallcap market as a way of identifying stock options with excellent prospects before the vast majority of investors discover them.
A third outlet is known as the over-the-counter bulletin board, or the OTC bulletin board. This outlet offers a wide range of electronic quotes on current activity of various types of over-the-counter stock, but tends to have a wider range than the national or smallcap markets. A final option for identifying and trading over-the-counter stock options is to use the Pink Sheets, well-known for offering information on bottom-tier stocks. With this outlet, there is a somewhat limited distribution when it comes to the availability of electronic quotes. Most of the companies traded in this outlet are not required to file and update their financial data with the Securities and Exchange Commission.
Over-the-counter stock options are usually connected with companies that are somewhat small, or for some other reason do not meet the criteria set by most of the larger exchanges. Brokers and dealers trade these stocks through networks that are often extremely efficient. Investors often find excellent deals on these networks, although there are sometimes higher risks associated with the credit ratings of companies that are traded on these networks. As with any stock purchase, it is a good idea to look at the general financial condition of the issuing company as well as the general performance of the stock before making a purchase.