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The OTC market is the stock market's version of "for sale by owner" (over the counter). It's an alternative to trading stocks, bonds, and other financial products on a public stock market like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).
The potential to get in on the ground floor of a hot stock is one of the benefits of investing in OTC securities. Because OTC investments are generally less expensive than their public market counterparts, you get more bang for your buck. There are, however, other aspects to consider when dealing OTC securities. Let's look at the fundamentals of OTC investment.
What exactly is OTC stand for?
OTC markets are electronic networks that allow two parties to trade without the involvement of a third party, such as a dealer-broker. They're referred to as dealer networks or markets. On the other hand, stock market are auction marketplaces. Following the announcement of a stock's price (the "ask"), investors fight for it by making bids.
Companies that trade over-the-counter are considered public, yet they are not listed. This means that their stock can be bought and sold on the open market, but not on a major exchange such as the NYSE or Nasdaq. As a result, these equities are subject to the same rules and restrictions that these exchanges apply to their listed corporations. To put it another way, no one from the government is watching them.
What kind of investments are traded over-the-counter?
Many OTC equities are stocks issued by tiny businesses that don't meet the requirements to be listed on major exchanges because they don't trade enough shares or sell for less than a particular price. Penny stocks are equities that trade for a very little sum of money.
Other OTC firms are larger, but they cannot (or will not) pay the major exchanges' listing fees. If a company qualifies for listing, it must pay a substantial fee to the exchange.
Most bonds are exchanged over-the-counter after their initial issuance (OTC). OTC markets are a better fit for bonds than stock exchanges because of the large volume of deals, the volume of bonds traded, and the infrequent trading of bonds.
- Derivatives include private contracts between two parties, typically arranged through the aid of a broker.
- Options, forwards, futures, and other contracts with a value determined by the value of an underlying asset
- Currency exchange rates
- Ethereum and Bitcoin are examples of cryptocurrencies.
Price Transparency Issues in OTC Trading - Risks As previously stated, a seller may charge one buyer one price for a security and another buyer a different price for the same security.
- Liquidity Issues - Because OTC equities are thinly traded, there isn't much demand for them. This makes it more difficult to sell them when the time comes.
- Volatility - OTC equities may experience substantial price swings due to their low trading volume.
- Lack of Regulation - OTC trading may be less regulated than big exchanges, depending on the market or OTC network you choose to trade on.
Conclusion
As previously stated, there are numerous hazards associated with OTC trading. Because all of India's standardised security markets are regulated by SEBI, they are more secure and reliable. Trading or investing should always be done using defined procedures and processes. Be a responsible trader by getting research-based trade recommendations.
Good luck with your investments!