What is an Unlisted Security?
Let me explain what an unlisted security is: it's a financial instrument that isn't traded on a formal exchange because it doesn't meet the listing requirements. You trade these on the over-the-counter (OTC) market, and they're often referred to as OTC securities. Market makers, or dealers, handle the buying and selling of these unlisted securities on the OTC market.
Key Takeaways
- An unlisted security is a financial instrument not traded on a formal exchange due to failing listing requirements.
- Unlisted securities are also known as OTC securities, with trading occurring on the over-the-counter (OTC) market primarily by market makers.
- You can track unlisted stocks via pink sheets or on the OTCBB.
Understanding Unlisted Security
Unlisted securities are typically issued by smaller or newer firms that can't or don't want to comply with the requirements of an official exchange, such as market capitalization thresholds or listing fees. Because they're not exchange-traded, they're often less liquid than listed securities. You can track unlisted stock via pink sheets or on the Over-The-Counter Bulletin Board (OTCBB).
Securities need to meet various requirements to be listed on an exchange. For instance, to list on the New York Stock Exchange (NYSE), a publicly traded stock must come from a company that exceeds an annual income or market capitalization threshold. The company also has to have issued a certain number of shares and be able to pay the exchange's listing fee.
These requirements mean only high-quality companies trade on exchanges. As a result, unlisted securities might be of lower quality and pose greater risks to you as an investor.
Types of Unlisted Financial Instruments
The most common type of unlisted security is common stock, which is often traded on the OTCBB or pink sheets. This includes penny stocks that trade at very low prices, and while some are legitimate foreign companies that don't want to file reports with the SEC, others vary in quality.
Beyond stocks, there are many unlisted non-stock instruments like corporate bonds, government securities, and certain derivative products such as swaps, all traded in the OTC market.
Risks Investors Should Know
The usual risks of investing are heightened with unlisted securities. Since size and other requirements for companies are lower or nonexistent, some unlisted companies might be undercapitalized, have highly risky business plans, or be just an idea without a solid path to success.
Other unlisted transactions involve counterparty risk, liquidity issues, and interconnection risks. This could mean one side failing to honor the contract. Without a formal exchange or clearing mechanism, it's entirely up to the reputation of dealers and counterparties to fulfill transaction obligations, including delivering securities and making required payments.
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