The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer networks as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.
In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.
Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or a sell a bond, he or she must call the bank that makes the market in that bond and asks for quotes.
Source: http://www.investopedia.com/terms/o/otc.asp
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