What Is OTC Trading, Types And Its Advantages For Traders
The terms over-the-counter or OTC trading are only popular among traders or anyone in the industry. This is because the activity itself can be quite segmented and only affect specific people. But let’s know more about what is OTC, what are the types, and how you can participate.
What is OTC Trading
The term over-the-counter refers to securities not in the market with the help of a broker-dealer. These securities can be in the form of shares, derivatives, bonds, cryptocurrencies, and several others. Companies that can’t afford the listing fee in the exchange market such as NYSE are trading their shares over the counter.
Technically, there is no specific OTC market like the regular exchange market. But there is the OTC-market group that specifically only works with OTC assets.
Pros and Cons of OTC
Most people think that OTC is a grey area since the securities are not in the regular trading market. And because you’re dealing directly with a broker-dealer who acts as a securities distributor, you may be worried about your investment. However, companies and distributors that are active in the OTC marketplace need to abide by the SEC regulations.
Another benefit of OTC is access to smaller companies with penny stocks. These stocks are perfect for traders with a keen sense of prediction to earn a massive profit.
Since they cover small companies, trading volume and activity may be small. In case you want to sell or buy any of their shares, the process may take longer than in the regular market. Another thing to note is that many traders consider the OTC market as high risk due to the lack of transparency on the stocks’ availability, prices, and companies.
Types of Securities in the OTC Marketplace
Here are several Securities that you can find traded over the counter.
· Stocks
An OTC Marketplace primarily holds shares from small companies. Most of them are short of the listing fee in their respective exchanges. For example, to list in NYSE, a company need to pay $295,000. However, several companies such as Danone and Allianz trade their shares in the OTC marketplace.
Due to the company’s size, the shares are far from being expensive. Thus, they are often called penny stocks. And you also need to be careful since some of the companies are shell companies or those that near bankruptcy.
· Cryptocurrencies
In addition to the regular crypto exchange, you can find some crypto coins in the OTC marketplace. Most of them are the highest-traded coins such as Bitcoin and Ethereum.
· Foreign Currency
Technically, Forex is an OTC market. As the transaction has to go through the dealer-broker. Therefore, whenever you trade or exchange your dollars for a foreign currency, you’re participating through the OTC marketplace.
OTC trading offers a very interesting profit margin. As it also encompasses smaller companies, it can be a good way to diversify your portfolio further. To ensure your investment keeps gaining profit, only purchase securities from companies with shares in regular exchange and OTC markets.
