You’ve definitely heard of an IPO in the stock market, which occurs when a significant firm enters the market and investors attempt to purchase its stock at that particular moment. This, however, is not the first stage of investing in a company. The stocks can already be purchased and sold before they hit the exchange; this is where the Over-the-Counter (OTC) market, which differs from the typical stock market, comes into play.
OTC (Over-the-Counter) investing entails purchasing assets that are not formally registered on an exchange. Dealers function as market makers in an OTC market by estimating the prices at which they will purchase and sell a currency, security, or other financial commodities.
- In an OTC market, a deal can be executed between two participants without others knowing the price at which the transaction was completed.
- OTC marketplaces, in general, are less transparent than exchanges and are subject to fewer rules.
- Due to a lack of data on the company, investors are unable to assess its potential for growth. That is why there is a high danger of fraudulent conduct.
As a result, investors should always evaluate securities and calculate the potential risks involved.
Investing is done through an Over-the-Counter Bulletin Board (OTCBB) or the Pink Sheets listing service. The OTCBB is an electronic quotation and trade service that promotes greater liquidity and information exchange. Pink Sheet is a private firm that collaborates with broker-dealers to prepare small company stocks for IPO in the capital market.
How to buy over-the-counter stocks?
Since OTC stocks are not listed on the stock exchange some online discount brokers do offer a service that allows you to purchase OTC stocks.
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Pros of OTC trading
- Stocks and other financial instruments, including derivatives such as swaps and forward contracts, can also be traded OTC.
- OTC shares are typically less expensive than those listed on a centralised market. As a result, you may purchase a large number of shares for a small amount of money.
- OTC trades are more flexible than their more standardised exchange-based competitors.
Cons of OTC trading
- Due to the unregulated nature of OTC trading, there is a higher chance of a counterparty defaulting on any specific arrangement. This is especially true for forward and swaps contracts.
Trading stocks over the counter (OTC) can be dangerous because corporations can provide less information than exchange-listed companies. This implies that organizations can often claim to be “up and coming,” which is not always the truth.