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What is OTCQX in securities trading?
What’s important to know about it?
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Table of Contents
What Is OTCQX
In over-the-counter markets, OTCQX refers to the highest-tier marketplace for trading stocks.
In other words, the stocks that trade in the OTCQX tier are those that strictly follow regulatory standards and have the highest level of transparency with the public.
The over-the-counter market tiering system is operated by the OTC Market Group with the aim of providing traders further insights into a company’s overall compliance with certain rules and criteria.
Companies in the OTCQX tier are those that make proper regulatory disclosures and are up-to-date, have high financial disclosure standards, and are sponsored by a professional third-party advisor.
Generally speaking, the over-the-counter market presents investors with higher levels of risk than centralized markets and stock exchanges.
To help investors navigate the over-the-counter market, the OTC Market Group classifies companies into different tiers (OTCQX, OTCQB, Pink Sheets, Grey Market) where the OTCQX tier includes companies that meet the highest disclosure and transparency standards.
Keep reading as I will further break down the definition of OTCQX and tell you how it works.
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Why Is OTCQX Important
OTCQX refers to a classification tier in the over-the-counter market where securities are traded.
The over-the-counter market refers to a decentralized marketplace where securities are traded between broker-dealers directly.
The broker-dealers are known as “market makers” as they look for interest in securities and negotiate the terms of trade.
However, since there are many securities traded over the counter, investors may have a hard time finding relevant information on the issuer to assess the company’s performance and risk profile.
To help the market make better decisions, the OTC Market Group has created an over-the-counter securities classification system where it classifies companies that meet certain qualification criteria.
Companies that are classified in the OTCQX tier are those that meet the highest level of standards and disclosures.
For instance, OTCQX tier securities are issued by companies that have audited financial disclosures, regularly make disclosures to the regulators, are up-to-date with their disclosures, and offer the highest level of transparency to investors.
For example, you can find blue-chip stocks from around the world that can have securities trading in the OTCQX over-the-counter market.
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Why Issuers Want The OTCQX Tier
There are several reasons why issuers or companies will want to trade their securities in the over-the-counter market and be classified in the OTCQX tier.
Since companies that meet the highest level of standards are classified in the OTCQX tier, investors and traders will generally have access to sufficient information on the company to be able to make an investment decision.
Although the OTCQX standards are not as strict as those imposed on companies listed on an exchange, it is still the top tier in the over-the-counter markets.
Companies that qualify in the OTCQX tier are those that have disclosure standards good enough to be potentially eligible to trade on a stock exchange.
In fact, there are many OTCQX securities issued by blue-chip companies and issuers that are listed on a stock exchange.
Companies, whether listed on a stock exchange or not, can sell securities on the over-the-counter market and avoid having to pay high costs associated with issuing shares on an exchange and having to make regular financial and legal disclosures.
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OTCQX Qualification Requirements
For a company to be eligible to be listed on the OTCQX tier in the United States, it must meet strict qualification standards.
From a disclosure perspective, the company must have audited financial statements, make regular disclosures to the regulators, and be up-to-date with its filings.
From a securities pricing point of view, the securities must have a minimum bid price of $1 in the preceding 90 business days and meet the financial criteria necessary to be listed on the Nasdaq Capital Market.
As you can see, companies that are eligible for the OTCQX tier are high-quality issuers.
However, even though you may be trading securities of high-quality issuers, it’s important to keep in mind that you are still trading in over-the-counter markets.
This means that you are exposed to higher levels of risk compared to centralized exchanges.
The main risks are counterparty risk, liquidity risk, along with all the other risks inherent to the market and the issuer’s business.
Before purchasing stocks or securities on the over-the-counter market, it’s important that you do your research and speak to a professional.
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OTCQX Meaning FAQ
What does OTCQX stand for?
OTCQX is an over-the-counter market classification that includes US domestic growth companies and multinationals looking to access US investors without having to get listed on a central exchange.
How do you qualify in the OTCQX market?
For an issuer to qualify in the OTCQX market, it must post its financial information with the OTC Market Group, should make regular disclosures to investors, and have an ongoing operation.
Foreign companies are not required to be registered with the SEC but must meet the requirements of qualified foreign exchanges.
Also, every issuer must have an approved third-party sponsor which can be an investment bank or law firm.
What are the different over-the-counter tiers?
In the United States, the OTC Market Group has created different markets, namely the OTCQX, OTCQB, and Pink.
The OTCQX is the tier where high-quality issuers are classified where issuers provide financial disclosures and are current with their regulatory filings.
The OTCQB is the next tier where issuers meet some eligibility criteria but are not as strict as the OTCQX tier.
The Pink market is where issuers present more risk, have less information available on them, and do not meet the requirements for listing in a US stock exchange.
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So there you have it folks!
What does OTCQX mean?
In a nutshell, in the US over-the-counter market, OTCQX refers to a tier of securities that observe high levels of disclosure to the public and meet strict qualification criteria.
Typically, companies trading in the OTCQX tier are companies that have their securities traded on international stock exchanges and regularly disclose information to the public.
The OTCQX market is an alternative marketplace for global companies to sell securities without having to specifically get listed on a stock exchange or Nasdaq and comply with strict issuance requirements.
For companies to be approved in the OTCQX tier, they must not only meet the eligibility requirements but must also have an approved OTCQX sponsor that can be an investment bank, attorney, or third-party investment professional.
The OTCQX tier is provided by the OTC Market Group which is an American financial market providing price and liquidity information for more than 12,000 over-the-counter securities.
Now that you know what OTCQX means and how it works, good luck with your research!
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