Over the Counter Stocks. Information on Pink Sheet OTC Stocks.
Over-The-Counter Stock Markets
There is misunderstanding about the over-the-counter (OTC) markets: that only small companies are listed.
The OTC markets will very much represent the future of the securities industry, when information and not location on the floor of the New York Stock Exchange will be highly valued.
At NASDAQ, the central trading floor is the computer. They have terminals at 750 locations nationwide that display information about trading activity. The computers are then linked to a central computer in Trumbull, Conn., and this constitutes the National Association of Securities Dealers Automated Quotations systems, better known as NASDAQ.
The OTC market is now home to thousands of small, relatively young companies that have only recently gone public. This is thanks to NASDAQ's admission requirements.
A company can be relatively unknown, without a long history of operating performance or a million dollar-income statement.
Many of the 4,700 companies on the OTC market might just as well qualify for listing on the New York Stock Exchange. It is believed, however, that they stay with the NASDAQ system because of its absence of trading "specialists."
Trading activity on the exchanges is controlled by the trader who is called a specialist. The specialist will promise to always buy or sell a particular stock for the right price when everybody else decides to sit on the sidelines or wants to bail out. For this privilege of this monopoly, the specialist pays a large fee to the exchange.
The specialist does serve an important function: Without the specialist, trading can simply break down and neither buyers nor sellers are willing to deal. This happened when the stock market plunged last October 19. Specialists sat out for a while when huge amounts of stock were dumped on the market in program trading.
The OTC market doesn't allocate such monopoly power to individuals. Several or many stock traders are free to "make a market" in a stock, and then, buy and sell it. That arrangement is thought to be much more competitive and more closely approaching the idealized perfect market. Many companies could be listed on the New York Stock Exchange, but many prefer the competing market-maker system instead of the specialist system.
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