What Are Over-the-Counter (OTC) Stocks?

Over-the-counter stocks, or OTC stocks, are shares that trade outside major stock exchanges such as the Toronto Stock Exchange, Nasdaq or New York Stock Exchange.

Instead, buyers and sellers trade through broker-dealers and electronic quotation systems.

OTC stocks can include smaller companies, foreign companies and businesses that do not meet or choose not to follow the listing requirements of a major exchange.

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How Do OTC Stocks Work?

Stocks listed on a major exchange are bought and sold through a centralized marketplace.

OTC stocks work differently.

Broker-dealers facilitate trades and publish bid and ask prices through electronic quotation systems. Your brokerage handles the transaction when you place an order.

Not every brokerage provides access to every OTC stock.

Why Do Companies Trade OTC?

A company might trade over the counter because:

• It is too small to qualify for a major exchange

• It does not meet an exchange's listing requirements

• It does not want the cost or requirements of an exchange listing

• It is a foreign company providing shares to investors in another country

Are OTC Stocks the Same as Penny Stocks?

No.

The terms are often associated because many penny stocks trade over the counter, but they do not mean the same thing.

OTC describes where and how a security trades.

Penny stock generally refers to a low-priced stock issued by a relatively small company.

Not every OTC stock is a penny stock, and not every low-priced stock necessarily trades OTC.

Are OTC Stocks Risky?

They can be significantly riskier than stocks listed on major exchanges.

Potential risks include:

• Low trading volume

• Large price swings

• Wide differences between buying and selling prices

• Limited financial information

• Difficulty selling shares

• Greater exposure to market manipulation and fraud

What Does Low Liquidity Mean for OTC Stocks?

Liquidity describes how easily you can buy or sell an investment without substantially affecting its price.

Some OTC stocks trade very infrequently.

You could buy shares and later discover that there are very few investors willing to purchase them from you.

Low trading volume can also create a large bid-ask spread.

For example, buyers might be offering $2.00 per share while sellers are asking $2.30. That difference can make trading more expensive.

Can Canadians Buy OTC Stocks?

Canadian investors may be able to purchase certain OTC securities through brokerages that provide access to them.

Availability depends on:

• The brokerage

• The security

• The market where it trades

• Account restrictions

• Applicable securities regulations

Some brokers may restrict certain OTC securities because of their liquidity, reporting or risk characteristics.

OTC Stocks vs. Exchange-Listed Stocks

The biggest difference is where they trade.

Exchange listed companies must meet the listing requirements of exchanges such as the TSX, Nasdaq or NYSE.

OTC securities trade outside these major exchanges and may be subject to different disclosure and quotation requirements.

This can mean less transparency and liquidity for some OTC securities.