If you are interested in piling up a substantial nest egg by investing in stocks, you have a number of options for acquiring them, ranging from formally organized stock exchanges to the looser world of over-the-counter stock trading. NASDAQ is a stock exchange, while OTC refers to over-the-counter stock trading, which involves a network of dealers trading stocks directly with each other. Both formats involve risk, but OTC particularly requires you to have the stomach to face it.
Centrality and Trading
Neither NASDAQ nor OTC has a trading floor where deals are made. In fact, both NASDAQ and OTC trading is managed by individuals at locations around the world. However, NASDAQ is a centrally managed exchange in which stock trades are made through the same NASDAQ electronic exchange communications network. OTC, meanwhile, does not operate out of a central location. Instead, dealers complete transactions directly with each other, using telephones and other electronic communications.
Like other exchanges, NASDAQ has a set of requirements that a stock must meet to be listed on its exchange. Standards include quantitative financial requirements, such as earnings, market capitalization, which is the value of a stock's outstanding shares, and assets. They also include corporate governance standards that concern topics such as shareholder rights and annual meetings. Meanwhile, existing OTC systems, such as the OTC Bulletin Board, which is an electronic quotation system, and the Pink Sheets, a listing of price quotes for OTC stocks, do not have minimum listing standards, according to the Securities and Exchange Commission.
NASDAQ maintains an ongoing regulatory relationship with the stocks on its exchange. The exchange requires stocks to make certain information public on a routine basis, providing transparency to investors about the companies on the exchange and their operations. In addition, all NASDAQ stocks must file financial reports with the Securities and Exchange Commission, which has oversight responsibilities of the companies. OTC stocks, in general, do not have the same rigorous requirements for transparency. However, OTC stocks that list themselves with the OTC Bulletin Board must file reports with the SEC.
Size and Profile
NASDAQ is an exchange designed to help usher new, emerging companies into the stock market. The exchange, therefore, has a high number of low-cap, growth stocks, which are stocks with modest assets and a strategy to grow rapidly. It also has a host of a large companies, such as Apple and Google, which have grown into secure, established blue chip stocks after years on the exchange. The OTC, meanwhile, focuses exclusively on small stocks. These stocks are often called microcap stocks. OTC stocks generally are considered higher-risk investments because they are small companies with uncertain futures, face no listing standards and typically do not have as much public information about them as readily available as stocks that trade on an exchange.