The stock market's version of "for sale by owner" is OTC (over the counter). It's a method of trading stocks, bonds, and other financial instruments between two parties rather than on a public stock exchange like the Bombay Stock Exchange (BSE) or the NSE.
Investing in OTC securities provides a number of advantages, including the ability to get in on the ground floor of a hot stock. You also get more bang for your capital because OTC investments are often less expensive than their public market counterparts. When trading OTC securities, however, there are other factors to consider. Let's take a look at the basics of OTC investing.
What does OTC mean?
OTC markets are electronic networks that allow two parties to trade with one another without the use of a middleman, such as a dealer-broker. Dealer networks or markets are what they're called. Stock exchanges, on the other hand, are auction marketplaces. A stock's price (the "ask") is announced, and then investors compete for it by making offers.
Companies that trade on the over-the-counter market are deemed public but not listed. This means that their stock can be purchased and sold in the open market, but it is not traded on a major exchange like the NYSE or Nasdaq. As a result, the rules and restrictions that these exchanges impose on their listed businesses apply to these equities. In other words, no one from the government is keeping an eye on them.
What kind of investments trade OTC?
Many OTC equities are stocks issued by small businesses that do not meet the requirements to be listed on major exchanges because they do not trade enough shares, or their shares do not sell for more than a certain price. Penny stocks are securities that trade for very low amounts.
Other OTC companies are bigger, but they can't afford (or don't want to pay) the major exchanges' listing fees. Companies need to pay high fee to the exchanges, if they qualify for listing.
After their original issuance, most bonds are traded over-the-counter (OTC). Because of the enormous amount of trades, the volume of bonds moved, and the infrequent trading of bonds, OTC markets are a better fit for bonds than stock exchanges.
Apart from stocks and bonds, OTC investments frequently include:
- Derivatives and private contracts between two parties that are usually arranged with the use of a broker.
- Options, forwards, futures, and other agreements whose value is based on the value of an underlying asset
- Foreign currencies
- Cryptocurrencies like Ethereum and Bitcoin
OTC trading has various risks as discussed above. Since all the security markets which are standardized in India are regulated by SEBI, they are more secure and reliable. It is always recommended to trade or invest only through standardized methods and processes. Get research-based trade recommendations and be a responsible trader.
Happy Investing!
