Before diving into the deep waters of stock investment research, familiarize yourself with the basics of stock exchanges. Most people know about the New York Stock Exchange and the popular market averages: the Dow Jones Industrial Average and the Standard & Poor's 500. When it comes to "over the counter" and Nasdaq stocks, however, the location and operation of the markets become a bit murkier but no less important to understand.
The Nasdaq and OTC markets both provide a variety of unique and potentially rewarding investment opportunities. That being said, the Nasdaq features more stringent listing requirements and regulatory oversight than the OTC marketplace.
Exploring The OTC Market
An over-the-counter stock is one that is not listed on an organized stock exchange. Instead, electronic communications networks bring information on trades in the stock, which take place among brokers, institutional market makers and individuals. Although many people assume Nasdaq stocks are over-the-counter securities, they are not.
The Nasdaq is younger than the New York Stock Exchange but actually much bigger in terms of daily dollar volume, number of issues listed and total market capitalization, or price multiplied by number of shares.
Researching the Nasdaq
Formerly known as the National Association of Securities Dealers Automated Quotations, the exchange run by Nasdaq Stock Market, Inc., is an electronic stock exchange that began in 1971. The Nasdaq does not operate from a single physical location or a trading floor where specialists meet, as does the New York Stock Exchange.
The Nasdaq is a sort of virtual stock market, a vast electronic agglomeration of stocks, exchange traded funds, warrants, preferred shares and other investments, each with an identifying ticker symbol and each quoted and traded through a network that automatically matches buyers with sellers. Nasdaq actually is made up of three market tiers, those being the Capital Market, the Global Market and the Global Select Market.
Evaluating Listing Requirements
A listing on Nasdaq does not necessarily mean cheap stock, risky stock or a low-capitalization company, although the exchange is heavy with high-tech firms. Microsoft, Intel, Facebook, Cisco, Texas Instruments, Oracle and Comcast all trade on Nasdaq exchanges. To get on the Nasdaq ticker, companies have to meet certain listing requirements.
The Nasdaq Global Select exchange, for example, requires at least $550 million in market capitalization, assets of at least $80 million and a bid price of at least $4 a share. If a company fails to meet the minimum Nasdaq listing guidelines, it is delisted and moves to the OTC market.
OTC Stocks Lists, Markets and Pink Sheets
The OTC market is a generic term for companies that don't trade on a single, organized exchange such as the NYSE or the Nasdaq. The OTC divides itself into three major components: the QX market, where companies have minimum financial requirements; the QB market, where they must be current in their financial reporting; and the Pink Sheets, where companies can (and do) trade with no disclosure whatsoever, even if their share price is less than a penny.
The trading takes place through electronic communication networks, where brokers and market makers post their bids -- their offers to buy, with share amount and price -- and asks, or offers to sell. Trading in OTC stocks can be volatile and risky, as thinly traded stocks tend to move more rapidly in price than more liquid securities.
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