The over-the-counter market simply refers to the purchase of investment devices without going through a centralized exchange. This can include a variety of investment types, not limited to, (i) stocks (ii) bonds and (iii) commodities. Because it encompasses a wide array of devices, it is fairly difficult to summarize this type of market. Investors normally participate in only one over-the-counter market but not as a rule. There are a few main advantages to the over-the-counter market.
Most noticeably, there are less transaction fees involved (broker fees etc.) because of the lack of necessity for a centralized market exchange. This reduces expenditure on transactions and increases the available capital and investor can utilize. This will make more funds available to invest in other instruments, if he so desires, or simply invest more in a particular stock, perhaps, increasing his returns, should his market predictions be correct.
Also, the very nature of OTC market means that more negotiation of prices is possible. This differs greatly from an exchange where orders for buying, and selling, are simply submitted and compatible transactions exchanged. In an OTC market setting, the investor may be able to negotiate the seller down to a very good price, given the more personal nature of this type of trade. Further increasing this prospect is the likelihood that the instruments being traded are not being made available on any exchange, making the seller more likely to accept any reasonable price offered by the investor, given the possible difficulty of finding another, suitable, buyer.
Finally, the OTC market is a bit more insulated against rapid market fluctuations associated with stock, and commodity, exchanges. This is partly because there is no constant trading, during exchange hours, which can vary prices wildly – even so far as to induce unnecessary panic among investors, if a stock’s value drops too far, too quickly. This panic will then lead to a real reason to panic when frightened investors scramble to sell their shares at ever decreasing prices. Such an event cannot happen in an OTC market setting. Also preventing such rapid losses is the fact that instruments, not traded on a central exchange, are not as tightly regulated, or as closely monitored, as those that are, meaning there is less chance of rapid decrease in value due to a minor resultant scandal.
The OTC market is perfect for investors who have the necessary connections to find sellers of the instruments they wish to purchase, without an exchange. They can save money, and insulate themselves against many of the risks associated with markets. The downside is the, somewhat, increased difficulty of finding a trade partner without the assistance of the very exchange they wish to avoid. This market is still worth considering as some of the best options for investment aren’t listed on popular exchanges.
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