OTC, or over-the-counter, is when securities trading happens outside the formal exchange. It means that there is no involvement of any regulatory body such as a stock exchange. Another example of a regulatory body is the Securities And Exchange Commission (SEC). In case you are wondering what the SEC is, consider this definition.
OTC trading generally takes place in the over-the-counter markets. These markets do not have any fixed or physical location. An investor trades over-the-counter assets under the supervision of and through a broker.
Over-the-counter trading stands for trading that does not happen in the formal environment. Because it does not happen at any proper place, you can buy and sell non-standardized items.
Here are a few facts about OTC trading:
- In this kind of trading, the prices are not usually published publicly.
- These contracts are bilateral. It means that the parties involved in OTC trading face credit risk.
An example of OTC trading
At present, there are numerous publicly traded OTC assets. These include varied securities and financial instruments.
The financial instruments making a part of the OTC generally include:
- Stocks (What are stocks? Find definition and examples here)
- Debt securities
Usually, you will find that the stocks of small companies are bought and sold OTC. You will often come across the publicly traded stocks of big companies on OTC.
Interestingly, derivatives form a vital part of the OTC market. The traders trade derivatives as OTC assets because they help them hedge the risk. These financial instruments offer the traders a perfect hedge because they let the parties involved in the trading tailor the specifications.
What are OTC networks?
Since these assets don’t find a place in the formal setting, a trader usually trades these through a broker. You can find a reliable and regulated broker to start your OTC journey. The well-known OTC market makers provide the OTC quotations to the interested parties.
They involve the market deals in the transactions to enable the investors to buy and sell these assets. If you wish to trade OTC assets, you can contact a broker via email or telephone.
Today, millions of online trading platforms help users trade OTC and other assets. You can find one and sign up by entering your relevant details.
Benefits of OTC trading:
The market offers various benefits of trading OTC to investors and companies:
- OTC trading provides a platform for small companies to sell their stocks. It helps them accumulate investments and grow further.
- These assets act as a cost-effective method of raising investment. Since there is no requirement to publish information for the public, it helps cost-cutting for the corporates.
- OTC is one of the best ways for small concerns and family businesses to go public.
- The dealers have an option to sell in the primary or secondary market.
- Investors get more freedom to choose an asset because of its availability in both primary and secondary markets.
- The OTC assets get traded transparently, and their delivery time is quick.
OTC trading has the most positive impact on traders. It is gaining significance for the plethora of opportunities it offers to traders. This kind of trading gives more flexibility to the market participants. You can trade all kinds of bonds, stocks, and securities on OTC. Consider the definition of bonds and the definition of stocks, if you want to learn more about these topics.