Over-the-counter (OTC) securities are financial instruments that are not listed on major U.S. exchanges like the NYSE or NASDAQ. Instead, they are traded through a decentralized broker-dealer network. OTC markets provide a platform for trading securities that may not meet the rigorous listing requirements of major exchanges.
Unlike securities traded on exchanges, those traded on OTC markets are subject to less stringent regulatory and listing standards. This means that some companies whose securities trade OTC sometimes disclose less publicly available business or financial information, increasing potential risks for investors.
Despite these risks, many companies and investors opt for OTC trading due to its flexibility and accessibility. OTC markets also offer opportunities to trade securities not available on major exchanges, including niche or early-stage companies with high-growth potential.
For companies, listing on OTC markets can be a cost-effective way to access capital markets without the expenses and administrative burdens of exchange listing. This is particularly appealing for startups, smaller firms, and international companies that want exposure to U.S. investors.
For more information, see: Investor.gov – Over-The-Counter (OTC) Securities, and FINRA – Over-the-Counter Equities Trading
[Written in December of 2024 by the Cornell Law School Securities Law Clinic]