Stocks can trade two different ways, either by listing on an exchange such as the New York Stock Exchange (NYSE) and Nasdaq, or over-the-counter (OTC).
Exchanges generally require stocks to trade above $1 to remain listed as part of their maintenance requirements, as well as a minimum market capitalization. These initial listing and maintenance requirements vary from exchange to exchange, find out more here.
In contrast, if a stock is listed and falls below either of these requirements, it may be delisted and begin to trade over-the-counter. (Find out more about what it means when a stock is delisted here.) Similarly, if it doesn’t meet the price per share or market capitalization requirements to begin with, it may start out trading over-the-counter.
This means that rather than trading on an exchange, or centralized body that matches buyers and sellers, the stock is traded only by wholesale dealers and market makers who specialize in trading the stock. These institutions provide a trading venue for non-listed stocks by either matching buy and sell orders from investors or filling orders from their own inventory in the stock.
Different reporting requirements
OTC stocks, which are sometimes referred to as penny stocks, have additional risks. For example, companies whose stocks trade OTC have fewer reporting requirements, and fewer regulations, which means investors may have a harder time getting complete information about them.
They also generally have fewer investors trying to buy or sell at any given time, and due to this limited demand, can be volatile because they are less liquid. In some cases, the pricing you receive when you buy or sell a stock that trades OTC may vary significantly from the last price it traded at it.
If a stock that was originally listed on an exchange falls below the $1 maintenance threshold and moves to the OTC markets, generally the stock ticker will change to a five letter symbol. For example, if the ticker was CRC before a stock traded on an exchange, it might then become CRCQQ. Remember, all investing involves risk, and OTC stocks can be even more risky than stocks that are listed on an exchange such as the NYSE or Nasdaq.