Introduction to over-the-counter (OTC) securities  

Introduction to over-the-counter (OTC) securities  

Over-the-counter (OTC) securities make up a wide variety of both domestic and foreign securities. OTC securities are historically more volatile and less liquid than those trading on a listed exchange. These securities typically have less publicly available information due to differences in reporting standards. Unlike exchange listed equities, there is no minimum listing standard for companies to be quoted on the OTC markets.

Many OTC companies are small or micro-cap securities, including penny stocks, which generally should be considered speculative investments. Investors should conduct thorough due diligence and understand the unique attributes of these securities before making an investment decision.

For more information, visit FINRA and The OTC Markets Group.

OTC securities are not listed on a major exchange in the United States. There are approximately 10,000 OTC securities making up a wide array of different companies.

While some OTC securities report to the Securities and Exchange Commission (SEC), others follow a different reporting standard or may not file reports to any regulatory body.

  • Shares delisted from a US exchange can begin trading OTC.
  • Conversely, shares once traded OTC can move to a listed exchange.

For additional information on the eligibility requirements, including corporate governance standards, visit OTC Markets.

Microcap securities Tooltip
For more information, read SEC's Microcap Stock: A Guide for Investors.

Due to lack of publicly available information and the illiquid nature of these securities, microcap stocks may be the target of fraud or other manipulative schemes. For more information, visit Microcap Fraud.

Information about microcap companies can be difficult to find, making them vulnerable to investment fraud schemes. Quoted prices in the market will likely not be based on full and complete information about the company.

  • Lack of public information
  • No minimum listing standards
    • Companies quoted on OTC markets generally are not required to meet any minimum standards.
    • Companies quoted in OTC Markets Group's OTCQX and OTCQB marketplace are subject to initial and ongoing requirements.
  • Risk
    • Many microcap companies are new and have no proven track record. Some companies have no assets, operations, or revenues. Others have products and services still in development or that have yet to be tested in the market.
    • Many microcap stocks trade in low volumes; risk pertains to any size of trade, which can have a large percentage impact on the stock price.
    ADRs and foreign securities
    Investors have the ability to invest in foreign companies in two main ways in the OTC market.
    • American Depositary Receipt (ADR) Tooltip
      The ticker symbols consist of five letters and end with the letter "Y."

      Many of the ADRs quoted on the OTC markets are unsponsored and the depositary bank established the ADR with or without the consent of the company. Unsponsored ADR programs may not provide shareholders with all the benefits of direct ownership, including voting rights often granted to sponsored ADR shareholders.
    • F shares Tooltip
      The ticker symbols consist of five letters and end with an "F."

      US broker-dealers continuously price F shares in accordance with local market share price movements and available liquidity. Trades are executed in U.S. dollars by US broker-dealers, but shares are settled, cleared, and custodied in the local market or, under certain conditions, in the US (Canadian or DTC eligible F Shares).
    To learn more, contact your Equity Trading Desk.

    Learn more about ADRs and F Shares at OTC Markets FAQs.

     

    Caveat emptor designation

    A skull and crossbones icon next to a stock symbol means the security has been designated as Caveat Emptor. OTC Markets Group uses the designation to indicate to investors there may be a reason to exercise additional care and perform thorough due diligence before investing.

    OTC Markets Caveat Emptor Policy:
    (Source: OTC Markets Caveat Emptor Policy page)

    The Caveat Emptor designation may be assigned when OTC Markets Group becomes aware of one or more of the following:

    • Promotion—The security is the subject of a misleading to manipulative stock promotion. Promotional activities may include news releases, spam email, and newsletters, whether they are published by the issuer or a third party.
    • Investigation of fraud or other criminal activities—There is an investigation or other indication of fraudulent or other criminal activity involving the company, its securities, or insiders.
    • Suspension/Halt—A regulatory authority or an exchange has halted or suspended trading for public interest concerns.
    • Undisclosed corporate actions—The security or company is the subject of a corporate action, such as a reverse merger, stock split, or name change, without adequate current public information.
    • Other public interest concern—OTC Markets Group may determine there is a public interest concern regarding the security. Such concerns may include promotion, spam, or disruptive corporate actions even when adequate current information is available.

    Learn more about the Caveat Emptor designation at OTC Markets.

    Are OTC securities marginable?

    Most OTC securities are not marginable. To check the margin availability, go to Schwab Advisor Center® > Trading > Order Entry > Margin Maintenance > enter symbol for information to appear.

     

    Are there any special funding requirements for purchasing OTC securities?

    Many OTC securities require cleared cash up-front for purchases. Contact your Equity Trading Desk for further details.

     

    Are there any differences between exchange listed securities and OTCs in the execution process?

    Due to the manual nature of the marketplace, notice of executions and outs may take longer than expected.

     

    Are there differences in the trading experience for foreign securities?

    Foreign securities may be charged an additional foreign transaction fee as well as applicable trading fees. Additionally, ADRs may be charged an ADR pass-through fee. Contact your Equity Trading Desk for updated quotes and to review your trade routing options.

     

    Why is there no current bid and ask on a security?

    Grey Market securities are not quoted by broker-dealers due to a lack of investor interest, financial information, or regulatory compliance. Use caution when placing orders in these securities.

     

    How do I request a review of an OTC security for acceptance?

    Schwab will perform a review on these deposits pursuant to its regulatory obligations to determine acceptability.

     

    The following are available to assist you:

    How to trade equities, mutual funds, and options through the Web Trading platform