What Is the NASD OTC Securities Exchange? Trading Shares of Unlisted Nigerian Companies
NASD is the SEC-registered over-the-counter market where shares of public companies not listed on the NGX are traded. Here is how it works, how it differs from NGX and how shares are held there.
The NASD OTC Securities Exchange is a SEC-registered over-the-counter market in Nigeria where shares of public companies that are not listed on the Nigerian Exchange (NGX) can be bought and sold through licensed brokers. It exists because Nigeria has many public limited companies whose shares are widely held but which have never listed on an exchange, or which have left one. Without an organised market, holders of those shares had no transparent way to find a buyer or a price. NASD provides that market, with its own rules, its own trading system and settlement through CSCS.
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Important disclaimer. This article is for educational purposes only. It is not financial advice and is not a recommendation to buy any specific share or investment product. Always do your own research and consider seeking independent financial advice before making any investment decision.
What "Over the Counter" Means
On a listed exchange such as NGX, a company applies to be admitted, meets listing standards and takes on continuing obligations. Over-the-counter trading is dealing in securities that are not listed on such an exchange. Historically it happened by telephone between dealers with no central record. NASD organised it: it is an electronic platform on which participating brokers post quotes and match trades in unlisted securities, with prices and volumes published so that holders can see what their shares last traded at. NASD describes itself as an over-the-counter market and a self-regulatory organisation, registered and regulated by the Securities and Exchange Commission.
Which Companies Are on NASD
The securities on NASD are those of public companies registered with the SEC but not listed on another Nigerian exchange. That includes long-established companies that have always been unlisted public companies, companies that delisted from NGX, and some that admitted their shares to NASD as a first step towards a later listing. A security can arrive on NASD in one of two ways: the company itself applies for admission, or a shareholder or broker introduces the security so that it can be traded even though the company has not applied. NASD also admits debt instruments and commercial paper, and it publishes the current list of admitted securities on its website.
Being on NASD does not mean a company has failed to qualify for NGX. Some companies have chosen to remain unlisted; some were introduced by their own shareholders so that the shares could trade at all.
How Shares Are Traded on NASD
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You do not deal with NASD directly. As with NGX, an investor opens an account with a SEC-registered stockbroker that is also a participant on NASD, and gives that broker an instruction. The broker enters a quote or an order on the NASD platform, where it is matched against other participants' orders. Prices on an OTC market are set by the quotes participants post and the trades they agree, and because fewer people trade unlisted shares, a security may have no trade for days or weeks. When a trade does happen, the broker issues a contract note in the same way as for an NGX trade.
- You need a broker that participates on NASD. Not every NGX dealing member does, so ask before you assume your existing broker can trade a NASD security.
- NASD has its own trading hours, price rules and fee schedule, published on its website. They are set by NASD, not NGX, and can differ.
- Liquidity is generally thinner than on NGX. An order may take time to fill, or fill only in part, and the gap between buying and selling quotes can be wider.
- The published price is the last price at which the security traded, which may be some time ago.
How Shares Are Held and Settled
CSCS is the central depository for the NASD market as well as for NGX, so a security admitted to NASD must be dematerialised into CSCS before it can be traded. Shares are then held in a CSCS account under your Clearing House Number (CHN), and a NASD trade settles through CSCS in the same way as an exchange trade, with the shares moving from the seller's account to the buyer's and money passing the other way. Confirm the current settlement cycle for NASD trades with your broker. If you hold shares in an unlisted company in certificate form, or only on the company's register with its registrar, the first step to trading them is to have them dematerialised, which the registrar handles with a broker.
NASD vs NGX: The Main Differences
- Listing status: NGX companies are listed and bound by NGX's listing rules and continuing obligations. NASD companies are admitted to trading but not listed, and their disclosure obligations come mainly from the SEC and company law rather than from an exchange's listing rules.
- Disclosure: a company introduced to NASD by a shareholder may publish less about itself than a listed company, because the company did not seek the admission. Read what is actually available before relying on it.
- Trading activity: NGX has far more participants and daily trades. A NASD security can go for long periods without a trade.
- Custody and settlement: the same. Both markets use CSCS and the same CHN, and a SEC-registered stockbroker is required for both.
- Regulation: both are regulated by the SEC. Each has its own rulebook, and each is a self-regulatory organisation that supervises its own participants.
When NASD Matters to an Ordinary Investor
Most first-time investors will only meet NASD in one of three situations. The first is inheriting or rediscovering shares in an unlisted public company, where NASD may be the only organised place to sell them. The second is holding shares in a company that delists from NGX and then trades on NASD. The third is a private placement or employee share scheme in a company whose shares later become tradable on NASD. In each case the process is the same: confirm the security is admitted, dematerialise the holding into CSCS if it is not already, and instruct a broker that participates on NASD.
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Find My SharesNASD OTC Market in Nigeria: FAQs
Is NASD part of the Nigerian Exchange?
No. NASD Plc is a separate company running a separate market. Both are registered with the SEC, and both use CSCS as depository, but they have different rules, participants and admitted securities.
How do I find out whether a company's shares trade on NASD?
NASD publishes its list of admitted securities and their trading data on its website, nasdng.com. A broker that participates on NASD can also confirm it.
Do I need a separate CSCS account for NASD shares?
No. Your existing CHN and CSCS account cover securities on both markets. What you may need is a different broker, if your current one does not participate on NASD.
Are NASD shares riskier than NGX shares?
The market is different rather than inherently riskier: fewer trades, wider price gaps and, for some companies, less published information. Whether any particular company is a suitable holding for you depends on the company and on your circumstances, which is a question for your own research and, if needed, independent advice.
Important disclaimer. This article is for general information and educational purposes only. It does not constitute financial advice, investment advice, or any recommendation to buy, sell, or hold any security. The value of investments can fall as well as rise. You should seek independent regulated financial advice before making any investment decision. Shares Saver does not provide financial advice.
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