OVER‑THE‑COUNTER (OTC)
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Trading that occurs via dealer networks rather than centralized exchanges.
Summary
Over-the-Counter (OTC) trading refers to securities transactions that happen directly between two parties through a network of dealers, rather than on formal stock exchanges like the NYSE or NASDAQ. Think of it like buying a car from a private seller versus going to a car dealership - OTC trades are more private, flexible, and less regulated. These markets are typically used for bonds, derivatives, currencies, and stocks of smaller companies that don't meet exchange listing requirements.
Usage Context
Understanding OTC markets is crucial when learning about market structure, liquidity differences, regulatory frameworks, and investment risks. This concept is particularly important when studying bond markets, forex trading, and alternative investment vehicles.
Common Confusions
- Thinking OTC means completely unregulated (it's less regulated, not unregulated)
- Confusing OTC with online trading platforms
- Believing OTC trading is only for institutional investors
- Assuming all OTC securities are risky or fraudulent
- Mixing up OTC markets with dark pools
