When a stock does not meet the listing standards of the NYSE, NASDAQ, or any of the other exchanges, it will trade solely in the non-NASDAQ over-the-counter (OTC) markets. The majority of these markets operate under the OTC Markets Group.
The OTC Markets Group is the end result of the non-NASDAQ OTC markets evolving from the “Pink Sheets,” a publication that printed stock quotes on pink sheets of paper back in the early 1900s. The Pink Sheets started as a market for lesser-known issuers without the financial requirements necessary to trade on big exchanges. Today, the OTC Markets Groups is a modernized organization that operates in a similar capacity to the now defunct Pink Sheets. It is divided into three prominent segments:
The OTCQX is the most prestigious market within the OTC Markets Group. While many of these companies do not meet the listing requirements of the NYSE or NASDAQ, the OTCQX has its own financial and reporting requirements. Companies listed on this market cannot be bankrupt or penny stocks, and must have their financial disclosure documents audited. If you’re really interested, click the upcoming link to see all of the requirements for US issuers to be listed on the OTCQX (although this information is generally not tested).
The OTCQB, sometimes referred to as a venture market, is a market for smaller developing companies. Typically, these companies do not meet the OTCQX’s listing requirements due to the early stage in their business cycle. However, there are some requirements to be listed on this market. Companies cannot be bankrupt, must have at least 50 shareholders, and are required to be audited. Although the details are usually not tested on the exam, click the upcoming link for a full description of OTCQB listing requirements.
All other securities that do not meet financial or reporting requirements of the NYSE, NASDAQ, OTCQX, or the OTCQB can be listed on the OTC Pink Market. In fact, there are no financial or listing requirements for the Pink Market. This is the perfect market for bankrupt or distressed companies, or even companies that want to avoid reporting their financials to investors. Due to the lack of transparency, most securities trading on the OTC Pink Market are very risky. Click the upcoming link if you’re interested in learning more about the real-world Pink Market (although this information is typically not tested).
The Over-The-Counter Bulletin Board (OTCBB) was shut down by FINRA in November 2021, and is not part of the OTC Markets Group.
Trades in these markets are considered second market trades. As a reminder, a trade of a non-listed stock (not listed on the NYSE or NASDAQ) in the OTC markets is considered a second market trade.
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