The beginner’s guide to understanding OTC stocks - DigitalAMN

June 7, 2018

When many people think of the stocks and the stock market, it conjures images of Gordon Gekko making trades and a blur of people frantically buying and selling on the trading floor. These images are ingrained from pop culture, but they aren’t quite accurate, especially not for the OTC market.

What’s the difference?

Let’s back up a few steps. There are two ways the financial markets are grouped: OTC market and the exchange market. OTC stands for Over-the-Counter, which facilitates the trading of currencies, stocks and commodities, directly between two parties. The exchange market completes transactions through an centralized source, like the New York Stock Exchange.

Decentralized

One major way OTC stocks differ from the traditional stock market is that it’s decentralized, meaning, there’s no brick and mortar location like the New York Stock Exchange or Nasdaq, where the actual markets trade.  OTC markets, however, are traded electronically and all communication is conducted electronically as well. Since there’s no central exchange point, OTC securities are unlisted.

Stocks for the people

OTC markets offer unique opportunities and more flexibility for investors. Since OTC stocks aren’t listed on the exchange, they’re traded via a dealer network, and these transactions are private between parties. There’s typically a smaller administration fee and deals can be tailored to fit specific needs. This flexibility makes OTC securities more centered around the customer market. Since most of the companies listed in the OTC market are too small to gain listing on the NYSE or Nasdaq, it’s a powerful opportunity for both investors and up-and-coming companies.

What’s right for me?

For people interested dipping their toe into the stock market, it’s important to consider what makes sense for your finances and overall goals. If you’re looking for more flexibility or to get involved with up and coming companies, OTC stocks would be more suitable. For those looking for a more traditional dealer setting with stable big name stocks, the exchange market is worth considering. Remember, it’s wise to talk to a professional who can assist you in selecting what’s right for your unique situation.

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