A stock is traded over the counter usually because the company is small and unable to meet listing requirements of the exchanges. Also known as unlisted stock, these securities are traded by brokers/dealers who negotiate directly with one another over computer networks and by phone. The Nasdaq, however, is also considered to be an OTC market, with the tier 1 being represented by companies such as Microsoft, Dell and Intel. Be very wary of some OTC stocks, however; the OTCBB (Bulletin Board) stocks are either penny stocks or hold bad credit records.

Instruments such as bonds do not trade on a formal exchange and are thus considered over-the- counter securities. Most debt instruments are traded by investment banks making markets for specific issues. If someone wants to buy or sell a bond, they call the bank that makes the market in that bond and asks for quotes. 

Many derivative instruments such as forwards, swaps and most exotic derivatives are also traded OTC.