Over the counter security refers to a type of financial instrument that is traded directly between two parties, without the involvement of an organized exchange. It is commonly abbreviated as OTC security.
Unlike stocks and other securities that are traded on formal exchanges such as the New York Stock Exchange, OTC securities are not listed on any official market. Instead, these securities are bought and sold directly between buyers and sellers through a decentralized network of dealers and brokers. This means that OTC securities do not have a centralized physical or virtual trading platform.
OTC securities include a wide range of financial instruments such as stocks, bonds, derivatives, and foreign currencies. They are typically considered less regulated and more speculative than securities traded on formal exchanges. Due to the absence of exchange regulations and listing requirements, OTC securities may have less liquidity and transparency compared to exchange-traded securities.
Investors trading OTC securities often rely on dealer networks or electronic communication networks to access price quotes and execute trades. The trading process may be less centralized and standardized, allowing for greater flexibility and negotiation between parties.
Overall, over the counter securities play a crucial role in providing alternative investment opportunities, particularly for smaller companies or those that do not meet the requirements for listing on formal exchanges. However, investors in OTC securities should be aware of the higher risks associated with these investments, including limited information availability and potentially higher transaction costs.
