The over-the-counter stock market (OTC) is the earliest type of stock market in the history of the stock market’s formation and development. So what is the OTC market? What are the characteristics & methods of trading on the OTC market? Through this article, Kienthuctrade.net will help you learn and analyze in detail.
Table of Contents
1. What is the OTC market?
The over-the-counter (OTC) stock market is the earliest type of stock market in the history of the stock market’s formation and development. The market is called OTC (Over The Counter) which means “Over The Counter Market”.(OTC market)
This comes from the specificity of the market that transactions on the market are done directly at the counters of banks or securities companies without having to go through intermediaries to enter the market. centralized auction.Thus, it
can be understood that the OTC market is a market without a centralized trading center, it is a network of brokers and dealers of securities buying and selling with each other and with investors. Trading of the OTC market takes place at the counters (exchanges) of banks and securities companies.
The most important feature of the OTC market to distinguish it from the centralized stock market is that the price setting mechanism is mainly by negotiation and bilateral agreement between buyers and sellers. Auction prices are limited and mostly small orders.
In the early days of the market, price negotiation was by direct agreement – “face to face”, but until now with the development of information technology, the negotiation can be done by phone and system. wide area computer network.
The OTC market plays the role of a secondary market, ie performs the role of regulating and circulating capital sources, ensuring the transformation of short-term capital into long-term capital for investment in economic development.
The development process of the OTC market is the process of developing from the form of a free and unorganized market to an organized market under the management of the State or of self-governing organizations and developed from traditional and manual forms of transactions to modern electronic forms of transactions. Currently, the OTC market is considered a high-level stock market with a high degree of automation.(Read more : Day Trading for Beginners)
2. Basic Features of the OTC Market
The OTC market in each country has its own characteristics, suitable to the conditions and characteristics of each country. However, the OTC market system in the world today is mainly built according to the US NASDAQ market model.
Therefore, it is possible to generalize some general characteristics of the OTC market in countries as follows:
* About the form of market organization: The OTC market is organized in a decentralized form, there is no centralized transaction place between buyers and sellers. The market will take place at transaction locations of banks, securities companies and convenient locations for buyers and sellers.
* Securities traded on the OTC market include 2 types: Firstly, accounting for the majority of securities that are not eligible to be listed on the Exchange but meet the conditions of liquidity and minimum financial requirements. of the OTC market, in which are mainly securities of small and medium-sized companies, high-tech companies and have growth potential.
The second is the securities listed on the Stock Exchange. Thus, securities listed and traded on the OTC market are very diverse and have higher risks than those listed on the Stock Exchange.
* The pricing mechanism in the OTC market is mainly implemented through negotiation and bilateral agreement between the buyer and the seller, which is different from the centralized auction mechanism on the Stock Exchange.
The form of order matching in the OTC market is very uncommon and is only applied to small orders. The price of securities is formed through separate negotiations and agreements, so it will depend on each trading partner in the transaction and so there will be many different prices for a security at a time.
However, with the participation of market makers and today’s centralized quotation mechanism via electronic computer networks leading to intense price competition between securities traders and thus, the gap The difference between the prices will narrow because of the “auction” between the market makers, investors only need to choose the best price from the quotes of the market makers.
* The market has the participation and operation of market makers, that is, trading – brokerage companies.
These companies can trade in two forms: First, they buy and sell securities for themselves, with the company’s capital – that is trading. The second is to act as a securities broker for customers to receive commissions – that is brokerage activities.(Read more : Scalping trade)
OTC stock market and over-the-counter stock market
3. Position and role of the OTC market
3.1. Location of the OTC market
The OTC market is a component of the stock market, which always exists and develops in parallel with the centralized stock market (stock exchanges).
However, due to the main difference from the centralized market in the mechanism of price setting negotiation and agreement, the goods on the market are diversified. Therefore, the OTC market has an important position in the structure of the stock market, as a supporting market for the centralized market.(Read more : forex scam tricks)
3.2. The role of the OTC market
Support and promote the stock market to focus on development;
Limiting and narrowing the free market, contributing to ensuring the stability and soundness of stock market;
Create a market for securities of small and medium-sized companies, securities not yet qualified for listing;
Create a flexible and favorable investment environment for investors.
4. Method of trading on the OTC market
The main principle of OTC trading is “agree to buy and sell”, trade by agreement and follow market principles. So to trade on the OTC Market, you can search for information and make purchases by:
- Using brokerage services of securities companies
- Through offers to sell or buy online and acquaintances
- Through stockbroker
- Transactions through the securities issuer the parties are buying/selling
5. What are the risks in the OTC market?
The market is not homogenous with stock prices, so there will be cases of “cheating” on the price, it is necessary to negotiate by bidding.
It should be noted that in the transfer and sale procedure, it is necessary to specify the ownership interest, because there are many cases where the sale and purchase agreement has been completed, but the seller still does not own the shares and the investor may not receive the dividend even though the sale and purchase agreement has been completed. still hold shares.(Read more : forex broker)
Risk of price fluctuations, ie the buyer will deposit an amount in advance, when the price drops, the seller will keep the agreed price or increase the price if the market price is high. Otherwise the buyer loses the deposit.
Low liquidity, difficult for investors to convert into money from stocks and vice versa.
To trade in the OTC market, you can open an account and carry out trading procedures. It is recommended that you participate in the listed stock market to reduce risk or invest (Happy-Fund)