OTC trading, also known as over-the-counter trading or off exchange trading, describes a transaction that is not conducted via a formal exchange. OTC trading creates plenty of opportunities for traders to partake in the forex, commodities, indices, and equities markets although it does carry a higher amount of risk than traditional investing which you should be aware of. OTC trades are executed via a dealer network and involve two separate parties.
The most common OTC market is the foreign exchange (Forex or FX) market, where currencies are traded 24 hours a day, 5 days a week via a network of banks and brokerages, instead of on traditional exchanges.
OTC trading can also include stocks, derivatives, and commodities.
Example of over the counter (otc) trading:
While there are some similarities, there are plenty of differences when you compare the OTC market with exchange trading. On a more traditional exchange, like the New York Stock Exchange, for example, you will see multiple buy and sell prices from various parties. However, with OTC trading, you will carefully choose one broker who you believe will offer you the best all-around trading conditions and go with the buy and sell prices they provide.
Key takeaways:
- Otc trading is more flexible than compared to more standardized and regulated exchanges
- Otc trading increases financial market liquidity, as companies that cannot trade on the formal exchanges gain the opportunity for exposure
- Otc trades have greater flexibility but are also considered riskier