Over-the-counter securities, commonly called OTC securities, are stocks, bonds, and other financial instruments that trade through a network of broker-dealers instead of on a centralized exchange like the New York Stock Exchange or Nasdaq. The category covers small-company shares, foreign stocks held through depositary receipts, most corporate and municipal bonds, and many customized derivatives. Because OTC issuers face fewer listing standards and often disclose less financial information, these securities can carry risks that exchange-listed investments typically do not.
How OTC Trading Works
On a traditional exchange, a central system matches buy and sell orders and displays a single price at any given moment. The OTC market runs differently. Broker-dealers called market makers hold inventories of securities and post the prices at which they are willing to buy (the bid) and sell (the ask) on electronic quotation systems such as OTC Link.1U.S. Securities and Exchange Commission. OTC Link LLC When you place an order, your broker routes it to one of those dealers rather than to an exchange’s matching engine, and the dealer on the other side of your trade may be selling from its own inventory or buying for its own account.
Because there is no single specialist setting prices, the same security can be quoted at slightly different prices by different dealers at the same moment. That is why your broker has a duty of best execution: FINRA Rule 5310 requires broker-dealers to use reasonable diligence to find the most favorable terms available for customer orders, and firms must have written policies explaining how they determine the best market for thinly traded stocks.2FINRA. 5310 – Best Execution and Interpositioning
What Gets Traded Over-the-Counter
Stocks and Depositary Receipts
The OTC equity market is home to companies that do not meet, or choose not to pursue, the listing standards of a national exchange: small startups, early-stage businesses, and foreign issuers. Foreign companies often participate through American Depositary Receipts, which are certificates representing ownership interests in foreign shares held by a domestic bank.3U.S. Securities and Exchange Commission. Additional Form F-6 Eligibility Requirement Related to the Listed Status of Deposited Securities Underlying American Depositary Receipts ADRs let you invest in a foreign company and receive dividends in U.S. dollars without buying shares on a foreign exchange.
Bonds and Derivatives
Most bond trading takes place over-the-counter. Corporate bonds, municipal bonds, and government agency debt move through dealer networks because the variety of fixed-income products, each with different maturities, coupons, and credit qualities, makes centralized listing impractical. The OTC structure also accommodates customized derivative contracts and private placements whose terms don’t fit a standardized exchange format.
OTC Market Tiers
OTC Markets Group, which operates OTC Link, sorts securities into tiers based on how much financial information the issuer discloses. Checking a stock’s tier is one of the fastest ways to gauge how much you can actually learn about a company before investing.
OTCQX Best Market
OTCQX is the top tier, designed for established companies that meet stricter financial and governance standards. A qualifying company cannot be in bankruptcy or reorganization proceedings, and it must conduct annual shareholders’ meetings with financial reports made available at least 15 calendar days beforehand.4OTC Markets. OTCQX Rules for US Companies Shell companies and penny stocks are excluded. Many OTCQX companies could probably list on a national exchange but choose not to, often to avoid the higher costs and regulatory burden.
OTCQB Venture Market
OTCQB is aimed at developing companies in earlier growth stages. An issuer must maintain a minimum closing bid price of at least $0.01 per share for 30 consecutive calendar days before applying, stay current in its financial reporting, and complete an annual certification signed by the CEO or CFO. Companies that fall below the minimum bid price get a 90-calendar-day grace period to regain compliance before being removed.5OTC Markets Group Inc. OTCQB Standards
Pink Open Market
The Pink Open Market has the fewest barriers to entry. It includes companies that may be in financial distress, that provide limited financial information, or that disclose nothing at all. Securities here are classified by how much data the company makes available, from “Current Information” down to “No Information,” so you can see at a glance how thin the paper trail is before putting money in.
The Expert Market
Below the Pink Open Market sits the Expert Market, a restricted tier for securities that fail to meet even minimal disclosure standards. When a company becomes delinquent in its SEC filings, its shares can be moved here with no grace period, and shell companies that stop publishing information also land in this tier.6OTC Markets. 15c2-11 Resource Center
The practical effect is significant. Quotations on the Expert Market are limited to unsolicited orders, and access is restricted to broker-dealers, institutional investors, and other sophisticated participants.6OTC Markets. 15c2-11 Resource Center If you are a retail investor and a stock you own gets moved here, you can still sell your existing shares through a broker, but you won’t see public price quotes, and finding a buyer may be difficult.
Penny Stock Rules
Many OTC stocks fall under the federal definition of a “penny stock,” which generally covers any equity security priced below $5 per share that is not listed on a national exchange or Nasdaq.7GovInfo. Securities and Exchange Commission Rule 240.3a51-1 Exemptions exist for securities with certain minimum net tangible assets, average trading volumes, or bid prices above $50 per share, but most small OTC stocks don’t meet those thresholds.
When a security qualifies as a penny stock, your broker must provide additional disclosures before completing the trade: a risk disclosure document, current bid and ask quotations, and information about the compensation your broker receives. These extra requirements exist because penny stocks are thinly traded, often lack publicly available financial data, and are disproportionately targeted by fraudsters.
The Main Risks
Limited Information
Many OTC issuers do not file periodic reports with the SEC or provide audited financial statements. The SEC warns that this makes it very difficult for investors to find current, reliable information about these companies and that OTC-quoted securities can be among the most risky investments available.1U.S. Securities and Exchange Commission. OTC Link LLC Before buying any OTC security, check which disclosure tier the company sits in and review whatever financial data it does publish.
Low Liquidity and Wide Spreads
Many OTC securities trade in very low volumes, which means there may be few buyers when you want to sell. Low liquidity also tends to produce wide bid-ask spreads, the gap between what a dealer will pay you and what it charges the next buyer. Those spreads can eat noticeably into returns. And if a stock you hold gets moved to the Expert Market, liquidity can dry up almost entirely because retail quotations are no longer published.
Fraud and Manipulation
The SEC identifies OTC stocks as among the securities most susceptible to manipulation, particularly through pump-and-dump schemes.8U.S. Securities and Exchange Commission. Pump and Dump Schemes Promoters use false or exaggerated claims spread through emails, newsletters, social media, or cold calls to drive up the price of a thinly traded stock, then sell their own shares at the inflated price. Later investors are left holding shares that collapse once the promotion stops.
Red flags include unsolicited tips about a stock you have never researched, promises of quick guaranteed returns, high-pressure tactics urging you to buy immediately, and claims tied to trending news stories.8U.S. Securities and Exchange Commission. Pump and Dump Schemes The SEC advises independently verifying any claim a promoter makes about a company’s products, contracts, or financial health before investing.
When the SEC believes public interest and investor protection require it, the agency can summarily suspend trading in any non-exempt security for up to 10 business days under Section 12(k) of the Securities Exchange Act. That power lets regulators halt activity in an OTC stock when they suspect fraud or manipulation, even before formal charges are filed.
Costs and Settlement
Trading costs for OTC securities typically include a commission, a markup (when the dealer sells to you from inventory at a higher price than it paid), or a markdown (when the dealer buys from you at a lower price than it plans to resell). These costs don’t always appear as a separate line item, so it’s worth asking your broker how it is compensated on OTC trades.
Most OTC equity transactions settle on a T+1 basis, meaning the trade is finalized one business day after execution. The SEC adopted this standard in 2024 under amendments to Rule 15c6-1, and it applies broadly to stocks, bonds, municipal securities, and exchange-traded funds. A limited exemption exists for securities whose transfer or delivery facilities are primarily located outside the United States.9U.S. Securities and Exchange Commission. Shortening the Securities Transaction Settlement Cycle
Taxes on OTC Trades
Gains and losses from selling OTC securities are reported on your federal tax return like any other investment. Your broker will issue a Form 1099-B showing the proceeds from each sale. Whether the broker also reports your cost basis depends on how the security is classified. Stocks acquired for cash after 2010 are generally treated as “covered securities,” meaning the broker must report the cost basis to the IRS. Older shares or certain noncovered securities may have no broker-reported basis, in which case you are responsible for tracking and reporting it yourself.10Internal Revenue Service. Instructions for Form 1099-B
The wash sale rule applies to OTC stocks too. If you sell at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the IRS disallows the loss for that tax year and adds the disallowed amount to the cost basis of the replacement shares.11Internal Revenue Service. Application of Wash Sale Rules – Notice 2013-48 That can catch you off guard if you sell an OTC position at a loss for tax purposes and then quickly repurchase it.