when companies do not meet the requirements to list on a standard market exchange such as the nyse their securities can be traded otc but subject to some regulation by the securities and exchange commission 
investopedia laura porterunderstanding otcstocks that trade via otc are commonly smaller companies that cannot meet the exchange listing requirements of formal exchanges stocks that trade on exchanges are called listed stocks whereas stocks that trade via otc are called unlisted stocks trade transactions occur through otc markets group s market tiers the otcqx otcqb and the pink open market 1types of otc securitiesstocks the equities that trade via otc are often small companies prohibited by the 250 000 cost to list on the nyse and up to 173 500 on the nasdaq 23bonds bonds do not trade on a formal exchange but banks market them through broker dealer networks and they are also considered otc securities derivatives these are private contracts arranged by a broker and can be exotic options forwards futures or other agreements whose value is based on that of an underlying asset like a stock american depositary receipts adrs these are sometimes called adss or bank certificates that represent a specified number of shares of a foreign stock foreign currencies currency that trades on the forex an over the counter currency exchange cryptocurrency digital coins like bitcoin and ethereum trade on the otc market otc markets groupotc markets group operates the otcqx best market the otcqb venture market and the pink open market although otc networks are not formal exchanges such as the nyse they still have eligibility requirements determined by the sec 1otcqx the otcqx does not list stocks that sell for less than five dollars known as penny stocks shell companies or companies going through bankruptcy the otcqx includes only 4 of all otc stocks traded and requires the highest reporting standards and strictest oversight by the sec otcqb often called the venture market with a concentration on developing companies that report their financials to the sec and submit to some oversight pink open market formerly known as pink sheets this is the riskiest level of otc trading with no requirements to report financials or register with the securities and exchange commission some legitimate companies exist on the pink open market however there are many shell companies and companies with no actual business operations listed here although nasdaq operates as a dealer network nasdaq stocks are generally not classified as otc because nasdaq is considered a stock exchange pros and cons of the otc marketbonds adrs and derivatives trade in the otc marketplace however investors face greater risk when investing in speculative otc securities the filing requirements between listing platforms vary and business financials may be hard to locate stocks trading otc are not known for their large volume of trades lower share volume means there may not be a ready buyer when it comes time to trade shares also the spread between the bid and the asking price is usually larger as these stocks tend to be more volatile based on market or economic data the otc marketplace is an alternative for small companies or those who do not want to list or cannot list on the standard exchanges listing on a standard exchange is an expensive and time consuming process and often outside the financial capabilities of many smaller companies otc provides access to securities not available on standard exchanges such as bonds adrs and derivatives fewer regulations on the otc allows the entry of many companies who can not or choose not to list on other exchanges through the trade of low cost penny stock speculative investors can earn significant returns otc stocks have less trade liquidity due to low volume which leads to delays in finalizing the trade and wide bid ask spreads less regulation leads to less available public information the chance of outdated information and the possibility of fraud otc stocks are prone to make volatile moves on the release of market and economic data 