What is the OTC Market?

What is the OTC Market?


In the universe of the stock exchange, there are many different types of markets and exchanges. In today’s post, we are going to talk OTC markets, also known as Over-The-Counter-Market. An OTC market is a decentralized market. It has no central location and is often done over the phone, email, and through online trading tools. It holds a looser mold verses the New York Stock Exchange; however, this does not mean there is not profit to be made in the OTC markets.

There is more fluidity and nuance in the OTC marketplace. Dealers can quote prices at which they will buy and sell stock, and a trade can be made between two individuals where the price does not have to be disclosed to the public. Sometimes market shares can come at a premium or higher price due to the risks and less regulations that come with OTC markets.

Here are some important things to know about OTC markets:

Understand What You Are Getting Into

“One does not simply walk into Mordor. Its black gates are guarded by more than just orcs. There is evil there that does not sleep, and the Great Eye is ever watchful. It is a barren wasteland, riddled with fire and ash and dust, the very air you breathe is a poisonous fume.” One could say this about the stock market, as well as the OTC market. It is a very dangerous world and is often filled with people will to cut, steal, cheat, and take advantage of lesser adequate participants. But this does not mean you must not enter the pearly gates of profit gain.  

Just like any complicated system, one must thoroughly understand what they are walking into. The OTC markets are a different beast than the regular stock market. OTC markets are usually used to trade bonds, currencies, structured products, and derivatives. It is a hot spot for penny stocks or pink sheets and is also used to trade other types of equities. OTC markets are regulated and watched the by FINRA, which stands for Financial Industry Regulatory Authority.

Risks Associated with OTC Markets

Like anyone going into the stock market, there are always risks involved, especially when it comes to your valuable money. Each market comes with its own set of complications and risks. One of the major risks found in the OTC markets is that of counter-party risk. This is when one party in a particular transaction will default before the completion of the trade or will fail to make current or future payments that are required of them in their contract. Due to regulations being at a minimum, situations like this are not rare, and even had a part to play in the financial crisis of 2008.

Limited Liability

Selling can be difficult in the OTC markets due to a lack of buyers and sellers. This can cause the value of a stock to be inconsistent due to which market makers decide to trade. Lack of liquidity can often make it difficult to sell stock in the future, and this is a major risks when it comes to the OTC market. This, however, does not discredit the OTC market, but only makes the real players more valuable.

If someone owns 50,000 shares and decides to sell, they may get bad news that it is not selling and may need to lower the value of the share. This is not ideal in a plan to make profit, but can be a risk that everyone should be aware of. The good news is that securities often sell in the OTC markets at fair market value, and this should not stop you from jumping in. It’s just critical to understand the risks.

Here at LVGI, we encourage you to explore the OTC markets. You can find us on there. Look up our symbol: LVGI. If you have any questions, please reach out to us. We would love to hear from you.