Over The Counter

Over the counter or OTC is referred to trading of security in some context but not on a formal exchange.

An OTC market is not based on a particular physical location. It is decentralized where communication between the participants happen over emails or phones or proprietary electronic trading system.

It is a personalized market where dealing is one on one. Nobody except the two parties involved has to know the price of an effected transaction.

The stocks exchanged in OTC are via a dealer network and not on a centralized exchange. It also covers debt securities, derivatives and other financial instruments that need a dealer network for their trading.

Generally smaller companies that are unable to meet the exchange listing requirements use OTC for trading their stock.

These securities are termed as unlisted stock. Brokers and dealers negotiate with one another to trade these unlisted securities. The dealings can also be done over the phone as well as computer networks.

Because Nasdaq is categorized as a stock exchange the stocks under Nasdaq don’t come under OTC. Despite that Nasdaq plays the role of a dealer network for these unlisted securities.

In general OTC stocks are traded either in the pink sheets or Over The Counter Bulletin Board (OTCBB).

Other instruments like bonds also do not list on formal exchange list and therefore fall under OTC securities. Investment banks deal in the trading of debt instruments.

If you are in investor and are looking out to buy or sell bonds contact the bank that deals in those specific bonds and ask them to send you quotes for the same.

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