Before (OTC), we must understand what securities are.
A fungible, negotiable financial instrument that holds some form of monetary value is referred to as a ‘security.’ It can indicate a stock ownership position in a publicly listed company, a creditor connection with a government or a business represented by owning that entity’s bond, or rights to ownership represented by an option.”
OTC refers to how securities are traded for a broker-owned dealer’s account or on behalf of its customers through a broker-dealer network. In contrast to trading on a centralized exchange, the phrase broker-dealer is used in U.S. securities regulation language to designate stock brokerages, as most of them serve as both agents and principals. Equities, debt instruments, and derivatives, which are financial contracts that derive their value from an underlying asset, such as a commodity, can all be traded over-the-counter. Sometimes, these securities don’t meet the listing requirements on standard market exchange and can be traded over-the-counter.
OTC stocks are usually smaller enterprises that are unable to fulfil the exchange listing standards of conventional exchanges. Many other forms of securities, however, are traded here as well. Listed stocks are those that trade on exchanges, whereas unlisted stocks are those that trade over the counter. Therefore, Over-the-counter trading, can comprise both exchange-listed and non-listed stocks. Over-the-counter equity securities, or OTC equities, are stocks that are not listed on a stock exchange and trade over the counter.