Over-the-Counter (OTC)

Over-the-Counter (OTC) refers to financial instruments that are traded directly between two parties, outside of formal exchanges. OTC trading can involve Stocks, Commodities, derivatives, and foreign currencies. Unlike exchange-traded Securities, OTC Securities are not listed on a centralized exchange, making them less regulated and often more illiquid.

Examples of OTC transactions include:

  • OTC Stocks: Companies that are not listed on major Stock exchanges, such as the Pink Sheets or OTC Bulletin Board.
  • Foreign currency transactions conducted between banks or other Financial Institutions without going through an exchange.
  • Derivatives such as swaps or forwards that are negotiated directly between parties.

Cases illustrating OTC trading include:

  • The 2008 financial crisis, where many Credit default swaps were traded OTC, leading to a lack of transparency and regulation.
  • Startups that issue Shares through OTC markets to raise Capital without the stringent requirements of an exchange.