Over-the-counter (OTC) market

Definition

The over-the-counter (OTC) market is a decentralized market where securities not listed on major exchanges are traded directly between parties. Transactions occur via a network of dealers and brokers rather than through a centralized exchange.

5 Must Know Facts For Your Next Test

1. OTC markets often handle trading of smaller, riskier companies and less liquid assets.
2. Prices in the OTC market are determined through negotiation between buyers and sellers.
3. The NASDAQ started as an OTC market but has evolved into a major stock exchange.
4. OTC trading can involve stocks, bonds, derivatives, and other financial instruments.
5. Regulation of OTC markets is generally less stringent compared to major exchanges like NYSE.

Review Questions

• How are prices determined in the OTC market?
• What types of assets are commonly traded in the OTC market?
• Why might a company choose to trade its securities in the OTC market instead of on a major exchange?

Related terms

NASDAQ: A global electronic marketplace for buying and selling securities, known for its high-tech listings.

Dealer Market: A financial market mechanism wherein multiple dealers post prices at which they will buy or sell a specific security.

Liquidity: The ease with which an asset can be converted into cash without affecting its market price.