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Over-The-Counter (OTC)

Over-the-counter (OTC) refers to financial instruments that are traded directly between two parties without being listed on a formal exchange. OTC markets are decentralized, with trades conducted through dealer networks rather than centralized exchanges. OTC trading is common for derivatives, bonds, and small-cap stocks. While OTC markets offer flexibility, they also come with higher risks due to lower regulation and less transparency compared to exchange-traded products.

Example

An investor purchases a corporate bond over-the-counter, negotiating directly with the bond issuer or dealer instead of going through a formal exchange.

Key points

• Refers to trading financial instruments directly between two parties without a formal exchange.

• Common for derivatives, bonds, and small-cap stocks.

• OTC markets offer flexibility but involve higher risks and lower transparency.

Quick Answers to Curious Questions

OTC markets are less regulated and offer lower transparency, increasing the risk of default or unfair pricing for investors.

Companies may use OTC trading for flexibility, access to customized products, and the ability to bypass formal exchange listing requirements.

Exchange trading is centralized and regulated, offering higher transparency, while OTC trading is decentralized and conducted through direct negotiations.