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