Monday, June 17, 2024

Over-the-counter (OTC)

Over-the-counter trading, referred to as OTC trading, refers to transactions that are not conducted on regular exchanges.

Instead, most OTC transactions will be between two parties and are typically processed through a dealer network.

OTC trading is less regulated than exchange-based trading, which creates a range of opportunities, but there are also some risks that you need to be aware of.

When you trade OTC with an exchange provider, you will typically see two prices listed: a buy price and an ask price.

This is different from exchange trading where you see multiple bid and ask prices from many different parties.

Forex

The most popular OTC market is Forex.

Forex trading also occurs in the over-the-counter market, as trades are executed outside of centralized exchanges.

This allows Forex traders to trade 24 hours a day as trading is not restricted by the market hours of official exchanges such as the New York Stock Exchange.

Instead, traders can buy and sell currencies through a network of direct connections to various banks, traders, and brokers.

Stock

Small company stocks, bonds, and other securities that are not traded on a formal exchange can be traded over the counter.

In the over-the-counter market, dealers (also called market makers) buy and sell securities from their own inventories.

So, if an investor wants to buy or sell a certain security, he would contact the dealer of that particular security and ask for the appropriate bid or ask price.

In the United States, the Over-the-Counter Bulletin Board (OTCBB) is a popular electronic inter-dealer quotation system through which OTC securities are traded.

OTCBB, as well as other inter-dealer quote networks such as Pink Quote, are regulated by the Financial Industry Regulatory Authority (FINRA).

Trading stocks over the counter can be considered risky because companies are not required to provide as much information as companies listed on the exchange.

If you want to learn more foreign exchange trading knowledge, please click: Trading Education.

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