UNDERSTANDING STOCKS

OTC Stocks and OTC Markets

Get an understanding of what over the counter (OTC) stocks and OTC markets are, plus key considerations.

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What are OTC stocks?

OTC stocks are a type of equity that is bought or sold in transactions that do not happen on a traditional stock exchange and instead trade "over the counter" through broker-dealer networks referred to as OTC markets.

Stocks that trade OTC include:

Shares of smaller companies, including small- and micro-cap growth companies, that do not meet the requirements to be listed on a national exchange.
Investments in foreign companies, including large-cap American Depositary Receipts (ADRs), and "foreign ordinary" stock shares that trade in the U.S.

What are OTC markets?

OTC markets are U.S. trading marketplaces that operate outside of traditional stock exchanges. They are decentralized (they don't have a firm physical location) and leverage a network of broker-dealers to connect buyers and sellers rather than the matching engine technology used by exchanges.

OTC markets are generally less transparent and less regulated than traditional stock exchanges, which makes them potentially riskier to invest in. Learn more about trading OTC stocks.

Trading in the OTC markets generally includes higher fees compared to listed stocks.

Are OTC stocks the same as penny stocks?

The term "penny stocks" refers to low-cost, speculative securities that typically don't trade on major stock exchanges. OTC securities don't trade on major exchanges and their price can vary. The term "OTC" refers more broadly to any security not traded on a U.S. stock exchange, including international stocks.

Limited available information

OTC stocks often lack the comprehensive public information required for listed stocks.
Limited transparency can expose investors to price uncertainty and elevated risk.

No minimum listing standard

Most stocks traded OTC aren't required to meet market capitalization or liquidity minimums.
OTC stocks that do meet specific requirements are quoted in OTC Market Group's OTCQX and OTCQB marketplaces.

Business and financial risk

Microcap OTC stocks ($50M–$300M market cap) carry high risk due to low trading volume and price sensitivity.
Many microcap issuers are newer companies with no proven track record.

Schwab's perspective on OTC stocks

We encourage investors considering OTC stocks to generally approach them as speculative, high-volatility investments that require careful research. Unlike exchange-traded stocks, OTC stocks often lack publicly available information, tend to trade at lower volumes, and have less liquidity, which can lead to wider spreads between bid and ask prices.

OTC markets: Multiple tiers

Investors can gain some insight into the information available on specific OTC stocks through the OTC Markets Group, a third party that classifies OTC-traded companies into three market tiers. Securities may move between tiers based on how frequently they disclose financial information. It's important to note that these tiers do not indicate the investment quality of a company and each tier has a different regulatory disclosure standard. OTC stocks that don't meet the standards of any tier are placed in fourth and fifth categories, known as the "expert market" and "grey market." OTC stocks that haven't met the minimum transparency standard for pink markets may trade in the expert or grey markets.

Pink Market ("Pink Sheets")

This tier is also known as the Open Market. There are no minimum financial standards in terms of regulation, and it can include a wide variety of companies, including foreign companies, penny stocks, shell companies, and other firms that choose not to disclose financial information. Within the Pink Market, firms are classified as showing current or limited information.

OTCQX

This is considered the highest tier of OTC markets' securities based on the amount of available information. In order to be eligible for the OTCQX tier, the firms must be current on all regulatory disclosures, maintain audited financials, and cannot be a penny stock, a shell corporation, or in bankruptcy.

OTCQB

This tier is designed for early-stage or growth companies. Companies must have a minimum bid price of $0.01. These companies must be current in their regulatory reporting and have audited annual financials in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Similar to OTCQX, these companies cannot be in bankruptcy.

Expert Market or Grey Market

All other securities that are traded over the counter are on the Expert or Grey Market. Expert and Grey Market securities are not quoted by broker-dealers due to a lack of investor interest, lack of financial information, or lack of regulatory compliance.

How do I invest in OTC stocks?

You can buy and sell OTC stocks on your own with a Schwab One^® Brokerage Account or call 888-245-6864 to talk to an experienced specialist about OTC stocks.

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