Over-the-counter Market
What is over-the-counter market?
The over-the-counter (OTC) market is a decentralized marketplace where securities are traded directly between two parties, without the need for a centralized exchange. Instead, trades happen through a network of brokers or dealers, allowing people to buy and sell various financial instruments such as stocks, bonds, derivatives, and currencies.
Key Features of the OTC Market
Decentralized Trading: Unlike formal exchanges, the OTC market doesn't have a physical location. Trades are made electronically or over the phone between buyers and sellers through dealer networks.
Types of Securities: The OTC market is mainly for securities not listed on major exchanges, like smaller companies' stocks (often called penny stocks), bonds, and derivatives. Many companies trade OTC because they don't meet the strict listing requirements of bigger exchanges.
Market Tiers: The OTC market is divided into different tiers based on reporting and disclosure standards. The OTCQX includes companies that meet high financial standards, the OTCQB focuses on growing companies with regular updates, and the Pink Open Market has companies with fewer reporting requirements, making it riskier for investors.
Less Regulation: OTC markets are not as heavily regulated as formal exchanges, which can lead to higher risks, such as lower liquidity, less price transparency, and a greater chance of fraud.
Advantages of OTC market
Access to Capital: The OTC market helps smaller companies raise funds without the strict requirements of larger exchanges.
Flexible Trading: Trades can be customized, allowing participants to negotiate terms directly to suit their needs.
Disadvantages of OTC market
Higher Risks: The lower regulation increases the chances of fraud and manipulation. There are also counterparty risks since trades are made directly between buyers and sellers.
Limited Information: There's often less information available about OTC securities, making it harder for investors to determine their value accurately.
