OTC (Over-the-Counter)

Over-the-Counter (OTC) refers to financial transactions that occur directly between two parties without being listed or traded on a centralized exchange. OTC trading is common in financial markets, including stocks, bonds, derivatives, and foreign exchange (forex).

Key Aspects of OTC Trading

1. Decentralized Market – OTC transactions occur via broker-dealer networks rather than through centralized exchanges.

2. Flexibility – Terms of the trade can be customized between buyers and sellers.

3. Less Regulation – OTC markets are less regulated than formal exchanges like the New York Stock Exchange (NYSE) or Nasdaq.

4. Used for Various Assets – Common in stocks (especially small or less liquid companies), forex, commodities, and derivatives.

5. Higher Counterparty Risk – Since there is no central clearinghouse, default risk is higher.

Examples of OTC Markets

• OTC Stocks: Small-cap stocks not listed on major exchanges (e.g., traded via Pink Sheets or OTC Markets Group).

• Forex Market: Foreign currency trading mostly occurs OTC between banks and financial institutions.

• Derivatives Market: Customized contracts such as swaps and forward contracts are traded OTC