OTC stands for over the counter. In short, this practice involves trading through a decentralized trade network. A decentralized market consists of various technical devices, allowing investors to trade without the use of a central location or shopfront. This makes it more convenient for traders who do not want to be set in a location.
OTC trading is becoming more and more popular and common. An example of OTC trading is any financial instrument that is bought through a dealer. This can be done using a variety of electronic devices, including a telephone or computer. Thanks to the development and improvement in technology, it is becoming easier for businesses to take part in OTC trading.
What Is An Over The Counter Trade?
The OTC market is organized by dealers and brokers who communicate and collaborate directly. As we will discuss below, there are plenty of advantages that come with reading OTC. One of these advantages is the fact that non-standardized quantities can be traded between the different parties.
The OTC market is essentially a network of companies that trade cheap stocks. Stocks that are traded on an exchange are referred to as listed stocks. However, if you trade over the counter, these stocks are called unlisted stocks.
Investors who use the OTC market do not experience much change when compared to regular trading. In fact, one of the largest differences is the fact that most transactions are wrapped up quicker when performed on the OTC market.
The OTC market is split into 2 different categories. This includes the customer market and the inter-dealer market. In short, the customer market allows different dealers to trade with their customers.
On the other hand, the inter-dealer market will enable dealers to trade with other dealers. With that being said, it is essential to note that the price quoted by a dealer often differs according to who they are interacting with.
It is important to note that the OTC market always includes smaller securities. For example, it consists of stocks that are not required to meet the capitalism standards. This market is often used by companies that are unable to keep their stocks above a specific price per share. More so, companies who file for bankruptcy often make use of the OTC market.
There are a wide variety of companies that rely on this market. Large and successful industries typically choose an exchange to list and trade on. A few examples of these big companies include Allianz, BASF, Danone, and Roche.
What Can Be Traded Over The Counter?
Now that we know exactly what the Over The Counter market is, it is important to understand what can be traded on this market. Stock trades need to take place either through an exchange or the OTC market.
Financial instruments, such as debt securities and derivatives, are usually traded on the OTC market. Another example of what can be traded over the counter is equities. Certain instruments, including bonds, are not suitable for formal exchange – for this reason, they are also traded over the counter by investment banks.
Benefits Of Over The Counter Markets
As we have already mentioned, there are plenty of benefits that come with trading over the counter.
It is important to note that the OTC is made up of shares of companies that would like to avoid the strict exchange standards. Others included businesses that wish to avoid the cost that exchanges charge.
Admin fees alone can often run as high as a quarter of a million per year. On top of this, the business would have to pay listing fees, which increase according to the size of the company. As you can see, forming a part of the exchange market runs at a high cost. In this way, the OTC market ends up saving the different businesses and companies a decent sum of money.
Another major benefit is the fact that OTC transactions do not include exchange fees. In this way, over the counter deals help businesses and companies to promote equity. More so, businesses can promote their financial instruments that otherwise do not meet the standards of established exchanges.
Summary
In short, the OTC market is formed by companies, dealers, and brokers who communicate and collaborate directly, making use of different technology. This market is used for trading stocks, financial instruments, bonds, and equities.
There are plenty of benefits that come with trading on the OTC market. For example, there are fewer fees and costs involved, meaning that businesses and companies will end up saving significant amounts of money. On top of this, traders will be able to promote financial instruments that do not meet the standard requirements of the regular exchange market.
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