Over-The-Counter (OTC)

Over-the-counter trading, or OTC trading, refers to transactions that occur outside of a formal exchange. Typically, most OTC trades are conducted between two parties and are often facilitated through a dealer network. OTC trading is subject to less regulation compared to exchange-based trades, which presents a variety of opportunities but also entails certain risks that traders should be mindful of.

When engaging in OTC trading with a provider, you will generally encounter two prices: a single buy price and a single sell price. This contrasts with exchange trading, where multiple buy and sell prices are available from various participants.

The most prominent OTC market is forex. Forex trading occurs in over-the-counter markets, as transactions are executed outside of a centralized exchange. This structure enables forex traders to operate 24 hours a day, as trading is not confined to the operating hours of formal exchanges like the New York Stock Exchange. Instead, traders can buy and sell currencies through a network that directly connects different banks, dealers, and brokers.

Stocks of smaller companies, bonds, and other securities that are not traded on formal exchanges can also be traded over the counter. In OTC markets, dealers, often referred to as market makers, buy and sell securities from their own inventories. Therefore, if an investor wishes to buy or sell a specific security, they would reach out to a dealer for the relevant bid or ask price.

In the United States, the OTC Bulletin Board (OTCBB) serves as a well-known electronic inter-dealer quotation system for trading over-the-counter securities. The OTCBB, along with other inter-dealer quotation networks like Pink Quote, is regulated by the Financial Industry Regulatory Authority (FINRA). Trading stocks OTC can be considered risky, as these companies are not required to disclose as much information as those listed on exchanges.