What Is Over-The-Counter?

What Is Over-The-Counter?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Over-The-Counter (OTC) refers to the trading of securities through a dealer network, as opposed to on a centralized exchange. These securities do not meet the requirements to be listed on a standard market exchange. Without the overhead of an exchange, OTC trading can occur directly between parties, often facilitated by the internet or over the phone.

Related Questions

1. What are some examples of Over-The-Counter securities?

Over-The-Counter securities can often include stocks, bonds, commodities, and derivatives. Unlisted stocks that trade via the OTC market, usually because they cannot meet the listing requirements of formal exchanges, are one common example.

2. Are Over-The-Counter markets regulated?

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Yes, Over-The-Counter markets are regulated, but not in the same way as standard exchange markets. OTC markets are less transparent and have fewer regulations. The Financial Industry Regulatory Authority (FINRA) oversees the OTC markets in the United States.

3. What does Over-The-Counter mean in pharmaceuticals?

In the world of pharmaceuticals, Over-The-Counter refers to medications that can be bought without a prescription. These drugs are considered safe enough for the general public to use without the guidance of a healthcare provider.

4. What is the difference between exchange trading and Over-The-Counter trading?

The main difference is that exchange trading happens on a centralized exchange, while Over-The-Counter trading occurs directly between two parties. Exchange trading provides more transparency and regulation, whereas OTC trading can offer more flexibility and privacy.

5. What are the risks associated with Over-The-Counter trading?

Over-The-Counter trading can be riskier than exchange trading because it lacks the same degree of regulation and transparency. There may be a higher risk of fraud or default related to a trade since the transactions are usually not monitored as closely as in the conventional markets.