What is OTC Trading?
OTC trading, or Over-The-Counter trading, is a type of stock trading that is done directly between two parties, without the need for an exchange or broker. The term “OTC” is often used interchangeably with “off-exchange trading”. OTC trading is usually done in the form of a bilateral agreement between two parties, and is not subject to the same rules and regulations as exchange-traded securities.
How Does OTC Trading Work?
OTC trading is conducted directly between two parties, usually through a broker or a dealer. The buyer and seller negotiate the terms of the trade, such as the price, quantity, and settlement date. Once the terms are agreed upon, the trade is executed and the buyer and seller exchange the assets.
What Are the Benefits of OTC Trading?
OTC trading offers several advantages to traders, including:
• Flexibility: OTC trading allows for more flexible trading than exchange-traded securities, as traders can negotiate the terms of the trade.
• Liquidity: OTC trading provides greater liquidity than exchange-traded securities, as there is no need to wait for a buyer or seller to appear on the exchange.
• Lower Cost: OTC trading is typically less expensive than exchange-traded securities, as there are no fees associated with the trade.
What Are the Risks of OTC Trading?
OTC trading also carries certain risks, including:
• Counterparty Risk: OTC trading involves a counterparty risk, as there is no central exchange to guarantee the trade.
• Price Volatility: OTC trading can be more volatile than exchange-traded securities, as the terms of the trade can be negotiated.
• Illiquidity: OTC trading can be less liquid than exchange-traded securities, as the buyer and seller must agree on the terms of the trade.
Conclusion
OTC trading is a type of stock trading that is done directly between two parties, without the need for an exchange or broker. OTC trading offers several advantages to traders, including flexibility, liquidity, and lower cost. However, it also carries certain risks, such as counterparty risk, price volatility, and illiquidity.
