In finance, OTC is a term which is related to the trade of stock directly among two individuals, companies or parties. OTC is short for over the counter. OTC may include bond or different types of goods, and is different from the exchange trade. In exchange trading there is a central source present among the buyers and the sellers for the transactions. The main benefit of exchange trade is the security of transactions. Contrasted to that are trades in OTC, where there are many intermediates that try to become a source for connecting the buyer and the seller. The main advantage of OTC trade is that the fee of intermediary is low. The stocks traded through exchange process should be of high standard that can be traded openly in front of everyone and on the other hand the stocks that are non standard are traded through OTC process of trading stock. The process of OTC trade is not so good because there is a risk of fraud in it. In OTC, there is also a risk in transactions for the both parties.
OTC Traded Stocks
The OTC trade of products is done by the individuals or companies that are known as market makers in United States of America. That individual or the company quotes the rates of buying and selling of different stocks and there is a hope to get profit from the bid. This type of trading is done under the OTCBB and pink sheets securities. In the stock exchange group there are no lists of stocks available that are that are traded through OTC. There are some requirements that an individual has to fulfill for the products that are quoted on OTC bulletin board and that requirement is reporting to the U.S securities exchange and commission. For the other types of OTC stocks, such as Pink Sheets have no any need of reporting. The OTC Market Group Inc. has set some guidelines for the products which are related or traded through OTCQX.
OTC is an agreement between two individuals or companies that the one party is the buyer of stocks and the other one is the seller of the stock. In the agreement the both parties decide the price of the stock in the present time for selling it in the future. This agreement is done directly among the two, one who is buying and the other who is selling. The means used for these agreements can be a computer or a telephone. This kind of OTC trade is also known as fourth market, which is direct and there is no any broker between the two contractors.
Risk in OTC trade
The OTC stock trading is a risky process. There are also some counterparty risks in which the transactions and payments are not done which are settled or decided in the agreement. There is an organization present which is for the investors in the OTC trading system, that organization is known as International Swaps and derivatives Association. This association tells the contactors how to decrease the risk of fraud. According to this association the contractors should be strong financially that can easily bear the nonpayment by the other party. The risk of nonpayment can also be decreased by not paying the other party first. Netting is legally binding contact which can be used in lowering the risk.
In this modern era, OTC trading is playing a vital role in global finance. The OTC trading system is expanded a lot in previous few years. It is a trading system with low rates because of no any person or broker between the contractors. In 2010, the OTC trading of stocks gave the benefit of estimated 600 trillion US dollars. The New York Mercantile Exchange decreases the risks of performance of both parties and the transactions. This exchange makes the both parties agree on transferring the trade to clear the transactions.