The term OTC trading aka ‘over the counter’ trading, or off-exchange trading. In a nutshell, trading is like a barter system in which one-person buys or sells goods or any other types of services to another person for money through online trading platforms. Internet-based brokers provide the opportunity for each and every people who want to earn money.
1 Introduction to OTC Trading
OTC trading or off-exchange trading is a form of online trading in which people buy or sell various goods or services without being supervised by the third party. The over-the-counter trading is not like a normal trade that happens in the Stock exchange. OTC trade happens among two parties directly.
There is a slight difference between the Stock exchange and over-the-counter trading. A stock exchange is an open market while over-the-counter trading has no transparency. Trading can take place 24 hours a day via OTC trading which is usually done online or using the telephone.
In the cryptocurrency industry, OTC desks are popular among those willing to sell large volumes of coins, such as miners or early crypto investors. On the other hand, there are many investors – including high caliber ones – who are prepared to buy crypto without resorting to major exchanges.
As we can see trading has made a remarkable growth over the years and it plays an important role in enhancing the global economy. Nowadays, online trading can be considered as a market place where various dealers or investors invest their money in order to make a profit. There are various trading platforms available and OTC trading is one of them.
OTC trades cover a wide range of assets – from commodities to financial instruments such as equities and derivatives. Unlike regular exchanges, the OTC market is dispersed and has no physical location. Trading takes place via dealer networks. Traders are not necessarily directly involved in the process because they can turn to brokers or brokers or OTC desks.
2 OTC desks are not listed on an official Stock Exchange
OTC desks are mostly securities that for various reasons are not listed on an official stock exchange. Smaller companies are often unable to meet the listing requirements of a formal exchange or pay the fees demanded by the major players in the industry.
This is where OTC trading comes into action. Not only does this market present the risks facing counterparties indirect business, but also the freedom and opportunities that make OTC trading increasingly popular with qualified investors, traders and even with trading giants. For example, Nestle, Bayer, Danone SA, and several other large companies trade their shares in OTCQX, the top tier of the three OTC equity marketplaces.
3 The OTC market is considered particularly favorable by Crypto Investors
Perhaps that’s why large corporations like Binance, Coinbase, and Circle opened their own OTC counters in the midst of cryptographic winter when the courses for Bitcoin and big old coins were anything but optimistic. According to some estimates, crypto-OTC trading currently has a larger daily volume than the major stock exchanges. For example, analysts from Digital Assets Research and the TABB Group found that the OTC market made $ 250 to $ 30 billion worth of transactions per day in April 2018, while exchanges made $ 15 billion worth of daily transactions during the same period -Dollar handled.
There are different types of OTC derivatives which can be classified as follows :
Interest rate derivatives: The primitive is a standard interest rate.
Commodity derivatives: The primitive asset is commodities such as gold or wheat.
Forex derivatives: The primitive is currency exchange rate fluctuations.
Equity derivatives: The primitive is equities.
Fixed Income: The primitive is fixed income securities.
4 Advantages of OTC Trading
OTC trading has a number of advantages. Some of them are:-
- Using OTC trading in your daily life can offer an array of different benefits.
- It allows every small or big company to trade who are not qualified to trade at a higher level.
- OTC trading does not take place at a physical location. Trading occurs directly between two clients or companies.
- Information regarding the trade can be provided directly from the dealer to the customer as there is good communication among them.
- OTC trading is a money-saving or you can say cost-efficient as compared to stock exchanges.
- It allows investors to make an effective choice from a wide range of stocks.
- They can be designed to fit specific needs, such as the effects of a particular exchange rate or commodity price over a given time.
- OTC plays a big part in helping them to provide consumers with stable prices.
- Companies say that such derivatives play a major role in offering consistent prices to consumers.
5 Disadvantages of OTC Trading
Though there are various advantages of OTC trading, there are some disadvantages too which are as follows: –
- OTC trading doesn’t promise to provide transparency like the stock exchange.
- The price for the services is not disclosed publically which increases the level of risk.
- The risk and lack of information about the services or stocks decrease the liquidity of the market.
- There is a lack of transparency
- The deliberative nature of the transactions causes market integrity issues.
- Precise details of risk and scope are not known to regulators, resulting in increased systemic risk.
- The absence of a clearinghouse or stock exchange leads to an increased credit or default risk associated with each OTC contract.
6 Is OTC Trading risky or safe?
Commodity Price Risk: Expansion financing is only possible if the future sale price is fixed. This price risk protection is ensured by tailor-made OTC derivatives.
Interest rate risk: Companies prefer to borrow from banks at a fixed rate to avoid the risk of rising interest rates. This can be achieved through an interest rate swap that sets the fixed interest rate for a loan term.
Currency Risk: With currency derivatives, companies can control the risk by locking the exchange rate, which is beneficial for importers and exporters who are at risk of currency fluctuations.
It’s quite difficult to say whether it is safe or risky because online trading or stock exchange is the other name for risk. There are thousands of companies that can be found on the OTC list, some of them are good companies while some are illiquid. So, one should do proper research about the companies before investing money.
7 Final Take away
Though the OTC market is a good place to invest money, detailed information is required so that customers and investors will use it wisely. Any amount invested would make sense only if it multiplies within itself for producing us more.