OTC vs. Exchange Listed

Simply put the Over The Counter market is where all securities that are not trading on a major US securities exchange, are listed in the US. Companies do not choose to list on the OTC market unlike with common securities exchanges. In the OTC market scenario, dealers will decide which unlisted securities they will trade on the OTC market. Typically, this is done based on investor enthusiasm. So what type of stocks trade OTC? Generally stocks that are thinly traded, have a small public float, are based in foreign countries, or lack the resources to trade on more formal exchanges will trade on the OTC market. Over The Counter trading can involve equities, debt instruments, and derivatives. In order to complete a transaction trades between two anonymous parties are facilitated by a network of dealers. The dealers will match buyers with sellers and execute the trade.  Most brokers, including online brokers offer OTC listed stocks so you can purchase both exchange traded and OTC through the same means. Some examples of OTC markets are Best Market (OTCQX), the Venture Market (OTCQB), and the Pink Open Market. OTC trading increases overall liquidity in financial markets, as companies that cannot trade on the formal exchanges gain access to capital through over-the-counter markets. One negative to OTC markets is they come with looser regulation which leads to less available public information and the chance of outdated information.

A regular exchange is like a public market place where people go to buy and sell securities. These exchanges do have physical locations however thanks to the digitization of our world the majority of transactions are done online. The same type of securities purchased in the OTC market can be purchased on a traditional exchange. The main purposes of an exchange are to provide fair and orderly trading and the efficient distribution of price information for any securities trading on that exchange. Information accuracy, distribution, and maintenance is a key difference between OTC markets and public exchanges. Some popular stock exchanges include the Toronto Stock Exchange (TSX), New York Stock Exchange (NYSE), and the National Association of Securities Dealers Automated Quotations (NASDAQ). Another stark difference between OTC and larger exchanges is the listing requirements. Specific requirements may include number of outstanding shares, market capitalization, and stock price among others. As discussed with OTC, unlisted companies do not choose which market they will trade on however with larger exchanges a business will apply to list on a particular exchange which will include a listing fee of tens, if not, hundreds of thousands of dollars. Big name exchanges can typically execute trades quicker and closer to the bid/ask prices due to the number of participants.