Over-the-counter -- OTC -- stocks are shares that do not trade on the stock exchanges such as the New York Stock Exchange or NASDAQ. Penny stocks trade exclusively in the OTC markets. However, not all companies trading OTC are penny stocks. Some very large international companies are listed over-the-counter.
The widely accepted definition of a penny stock is a very small company with a share price of less than $1. The Securities and Exchange Commission rules regarding penny stocks apply to any stock with a price less than $5 and trading on one of the OTC markets. Penny stocks often are very low-priced, with shares below 10 cents each or even less than a penny. Penny stocks tend to be very speculative, often with more promotion by brokers behind the stock than any real business results.
With an over-the-counter stock, there is no exchange to match buyers and sellers. Instead there are market makers -- an individual or company that handles the buying and selling of a particular OTC stock. The market maker will buy shares investors want to sell and sell to buyers. In OTC trading, the market makers have much more control over share prices than exchange-traded shares, which move due to supply and demand forces.
Finding Penny Stocks
OTC stocks are listed electronically on the OTC Bulletin Board -- OTCBB -- or by OTC Markets Group Inc. The majority of the listings on the OTCBB are penny stock companies. OTC Markets Group has several levels of stock listings with different qualifications for a stock to be included on a certain level. The OTC Pink Sheets are the home of penny stocks for OTC Markets Group. Investors looking for penny stock price quotes will find those low-cost stocks on either the OTCBB or the Pink Sheets.
Non-Penny OTC Stocks
OTC Markets Group includes two other market levels, referred to as OTCQX and OTCQB. A company must meet higher listing standards to be listed on the QX or QB markets. The OTCQX is limited to the highest-quality over-the-counter companies. The QX market has attracted quite a few large foreign companies that list American depository receipt -- ADR -- shares on the market. Companies such as Nestle, Hitachi and Walmart de Mexico list on the OTCQX. These are definitely not penny stock companies.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.