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What is an over-The-Counter Market?

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  • Written By: Gerard S. Walen
  • Edited By: J.T. Gale
  • Last Modified Date: 28 November 2016
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Many people, even if they do not actively trade stocks, are aware of the major stock exchanges, such as the New York Stock Exchange (NYSE), Nasdaq, and the London Stock Exchange (LSE). Many companies, however, do not trade on the major exchanges. Instead, their securities are offered in the over-the-counter market. In this type of market, the stocks are traded over the phone, via facsimiles, or through an electronic network.

Unlike the conventional exchanges, there is no physical location of the over-the-counter market, such as the NYSE, which allows floor trading within its building. Instead, items are traded over other mediums. Among the items traded in the over-the-counter market are government securities, corporate bonds, and equity securities — stock that represents partial ownership of a company. A network of broker-dealers usually facilitates the buying and selling orders of investors.

Companies will choose to issue securities on the over-the-counter market for various reasons. Sometimes, the company will not meet the qualifications to list on a major exchange. Other times, the securities are too sporadically traded or too volatile to be listed on one of the major exchanges.

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Two of the better-known examples of trading networks within the over-the-counter market are the Over The Counter Bulletin Board (OTCBB) and the Pink Sheets. The OTCBB operates as an electronic quotation system for broker-dealers, and it displays real-time quotes, prices, and volume for some over-the-counter securities. It is regulated by the Financial Industry Regulatory Authority (FINRA), an office of the United States Securities and Exchange Commission (SEC). To have securities quoted on the OTCBB, a company must file required reports with the SEC or with the regulator for its industry, such as insurance or banking.

The Pink Sheets, published by privately held Pink Sheets LLC, also operates an electronic quotation system for dealer-brokers. Pink Sheets, however, does not require companies to meet any requirements for listing. Listed companies are usually held by just a few shareholders and are quite small. Shares generally are thinly traded.

Many Pink Sheets-listed companies file no reports or financial statements with the SEC. Because of this, it is often difficult for members of the public to locate reliable or current information about the companies. The name comes from the pink paper on which quotes were printed for distribution to dealers. The symbol for a stock that trades on the Pink Sheets always ends in ".PK."

Some of the securities that trade in the over-the-counter market are known as penny stocks. The definition varies, but generally penny stocks are shares in a company that sell off the major market exchanges for prices as low as a penny or less a share, though some sell for more. Penny stocks are usually considered highly risky and speculative investments because of the lack of regulatory oversight.

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