Over-the-Counter (OTC) Trading

Understanding Over-the-Counter (OTC) Trading

Over-the-Counter (OTC) trading, also known as off-exchange trading, is the process of trading securities through a network of broker-dealers rather than a centralized exchange. This type of trading involves various financial instruments, including equities, debt instruments, and derivatives, which derive their value from an underlying asset, such as commodities.

In certain cases, securities may not meet the requirements for listing on a standard market exchange, and as a result, they can be traded over-the-counter instead.

Unlike exchange trading, which takes place through a centralized exchange, OTC trading is a decentralized process that occurs through a network of dealers. It enables investors to create a marketplace without the need for a central location.

Smaller securities, including stocks that fail to meet market capitalization requirements, are often traded over-the-counter. Additionally, companies that are unable to maintain their stock price above a certain level or are undergoing bankruptcy filings can also participate in OTC markets.

However, it is important to note that OTC trades come with certain risks. Investors may face additional risk when engaging in over-the-counter trading. Furthermore, OTC prices are not publicly disclosed until after the completion of the trade, which means that a transaction can occur between two parties without others knowing the price at the time of the trade.