What is Over the Counter (OTC)? [The complete guide for Investors]

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

Risks of OTC Trading

• Price Transparency Issues - As previously stated, a seller might hypothetically charge one price for a security to one buyer and another price to another.


• Liquidity Problems - There isn't much demand for many OTC stocks because they are thinly traded. This can make it difficult to sell them when you need to.


• Volatility - Because OTC securities have a lower trading volume, they may undergo large price movements.


• Lack of Oversight - Depending on the market or OTC network you choose to trade via, OTC trading may be less regulated than big exchanges.