Over-the-Counter (OTC)

Over-the-counter, or OTC, describes trading that happens outside a formal, centralized exchange like the NYSE or Nasdaq. Instead of orders meeting in one central marketplace with a single visible order book, OTC trades are arranged through a decentralized network of dealers who quote prices to each other and to clients.

In stocks, "OTC" usually refers to shares that trade on OTC Markets Group's tiers (often called the pink sheets, or the OTCQB and OTCQX for somewhat more established companies) rather than on a major exchange. These are often smaller companies, foreign companies that haven't listed on a US exchange, or firms that have been delisted from a bigger exchange. Dealers called market makers post bid and ask prices for these stocks and trade out of their own inventory, rather than simply matching buyers and sellers electronically the way an exchange does.

The nuance that trips people up is that OTC is not one single thing — it's a catch-all for "not on a listed exchange," and the quality and reliability of that trading varies enormously. Some OTC-traded instruments, like the interbank foreign exchange market or many corporate bonds, are OTC simply because those markets have never been organized around a central exchange, and plenty of large, legitimate institutions trade there daily. But OTC equities specifically are often thinly traded, meaning there are fewer buyers and sellers at any moment, spreads (the gap between what buyers offer and sellers ask) tend to be wider, and public information about the company can be sparse or unverified compared to exchange-listed stocks.

Because there's no single exchange enforcing consistent listing standards, disclosure requirements, and trading rules across all OTC venues, the exact obligations a company faces — and the protections a trader has — depend on which OTC tier the stock sits in and which regulator's rules apply.