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Answer Posted / thara
refer to stocks that trade via a dealer network as opposed
to on a centralized exchange. It also refers to debt
securities and other financial instruments such as
derivatives, which are traded through a dealer network.
In general, the reason for which a stock is traded
over-the-counter is usually because the company is small,
making it unable to meet exchange listing requirements. Also
known as "unlisted stock", these securities are traded by
broker-dealers who negotiate directly with one another over
computer networks and by phone.
Although Nasdaq operates as a dealer network, Nasdaq stocks
are generally not classified as OTC because the Nasdaq is
considered a stock exchange. As such, OTC stocks are
generally unlisted stocks which trade on the Over the
Counter Bulletin Board (OTCBB) or on the pink sheets. Be
very wary of some OTC stocks, however; the OTCBB stocks are
either penny stocks or are offered by companies with bad
credit records.
Instruments such as bonds do not trade on a formal exchange
and are, therefore, also considered OTC securities. Most
debt instruments are traded by investment banks making
markets for specific issues. If an investor wants to buy or
sell a bond, he or she must call the bank that makes the
market in that bond and asks for quotes.
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