In connection with the stock market, you may have already come across the term "over the counter" or "OTC" for short. In this article, you will find out what exactly OTC means and what advantages and disadvantages it entails.
OTC Meaning
The term OTC is used to describe trades that not on the traditional stock exchange are transacted. Over-the-counter trading or direct trading usually takes place via dealer networks, between two parties over the telephone or via electronic platforms.
Parties involved in OTC trading can be securities firms, brokers and banks, but also investors or other institutions.
Translated, the term means something like "over the counter". Here there are normally only two pricesa buy price and a sell price. OTC trades are subject to fewer regulationswhich can be accompanied by opportunities, but can also entail risks.
The following are often traded Shares or commoditiessuch as oil or electricity. There are separate platforms for OTC trading for this purpose.
OTC trading: risks and opportunities
One disadvantage of OTC trading is the Lack of regulation. This increases the risk that the counterparty may default. Swaps, for example, are particularly affected.
The trade in Stocks can be riskier. The lack of regulation means that there is less pressure for transparency, which means that companies that are not listed on the stock exchange are often less information publish.
OTC trading is a Possibility for companiesthe conditions of the classic Stock exchanges of the securities to date. They can finance themselves and work on their growth.
This can also Investors profit: Shares are usually available via OTC trading more favorable which can increase the potential returns.
The lack of regulation offers opportunities through a Increased flexibility. Trades can be specially adapted to the two parties involved, as they are not standardized.
Another advantage is that investors not bound to the opening hours of the exchange are. This is particularly important for the forex market, where OTC trading is popular.
In addition, the Fees for trading on the stock market. This can be an advantage for day traders in particular, as sums can accumulate quickly and even small sums can make a big difference.
OTC trading vs. stock exchange trading
In contrast to OTC trading, the market on the traditional stock exchange is more liquid. Strict regulations also apply, which means that participants have to Standardization can rely on. Furthermore Transparency is guaranteed, as certain information must be disclosed.
Price information is also important. On the stock exchange there is a generally valid price, while in OTC trading it can happen that the Current market price not publicly known is given.
Conclusion: What does OTC mean? Over the Counter?
OTC or Over the Counter designated off-exchange trades between two parties. OTC trading is less transparent and unregulated, but also offers opportunities such as lower prices for investors, capital procurement for companies, the waiver of exchange fees and increased flexibility.
The Stock exchange trading differs in that it is strongly regulated and thus standardizations are available and a sufficient Transparency is guaranteed. In addition, current market prices are publicly available.