Stock Market and OTC Markets : Detailed Analysis

OTC Markets

Stocks can be traded over the counter along with stock exchanges. OTC Markets is primarily a decentralised platform that is sans reasonable regulations. Also, the stock and over the counter markets have several distinctions. The former is well regulated. Also, listed companies get traded over a stock exchange, while that is not the case on an OTC. Thus, it is riskier in the sense of security. However, one may lose funds while trading on a stock market without knowledge and the right broker like TradedWell, ROinvesting, etc.

What is Over the Counter Market? 

OTC or over the counter market is a decentralised market where traders from different backgrounds can trade commodities, stocks, indices, currencies and other instruments. Here, two traders can exchange assets without the requirement of any exchange or a broker. Moreover, OTC does not have any physical locations. Trading takes place electronically. However, it is not related to the auction market system. 

Dealers are the market makers in OTC markets. They quote the buying and selling prices to sell and buy a currency pair, security and other financial products. Trade between two rookies can take place, and others may not come to know about the price transaction. That means the OTC markets lack transparency compared to exchanges. In addition, there are no or fewer regulations on them. So, they are even less secure.

It is buying and selling of assets between two market participants or individuals on an unlisted platform. 

Thus, it requires a premium to force liquidity in OTC markets. 

The necessity of OTC markets 

The primary use of OTC markets is to trade derivatives, bonds, structured products and currencies. Moreover, traders utilise them to trade equities like OTCQB and OTCQX. 

In the global financial markets, OTC markets have a significant role to play. Moreover, OTC derivatives have an exceptional significance as they offer greater flexibility to market participants. Thus, the risk exposure of derivative contracts gets managed easily. 

Moreover, it facilitates companies that cannot trade on exchanges to trade here and gain access to much-required capital.  Thus, it gives a thrust of liquidity in the financial markets. 

The OTC market is available for companies that either cannot get listed or don’t want to be a part of a coveted exchange. In addition, it is an alternative for minuscule companies because listing on exchanges is time-consuming and an expensive process. Thus, quick access and accumulation of capital are added advantages in the OTC markets. 

Lack of liquidity

There are times when OTC markets do not have enough sellers and buyers, which halt the transactions. Thus, the value of a security may vary decisively depending on various parameters. Also, the market markers affect the trading. Moreover, in the absence of liquidity, the trader has a difficult time ensuring profits. Furthermore, selling stocks in the future may become challenging, and the market participant may have to deal with the dilemma. 

Risks associated with OTC markets 

OTC markets may seem to be running well during regular times. However, there is a counterparty risk that one of the participants may not comply with the agreement and commit a default during the transaction before the trade’s completion. Hence, there’s no future or current payment as per the contract. 

Also, it is difficult to derive the fair value of securities due to the complicated design. So, the speculation risk and unexpected events can destabilise the markets and dry funds. 

Moreover, the lack of transparency provides loopholes to wilful defaulters for committing a cybercrime. It was seen during the global economic crisis 2007-08 due to burgeoning financial stress. 

Derivatives like collateralised debt obligation (CDO) and collateralised mortgage obligation (CMO) traded in the OTC markets did not have reliable pricing due to the absence of buyers; liquidity dried up. Thus, other dealers started to withdraw whatever belonged to them in haste, denting the market furthermore. Therefore, it exacerbated the liquidity issue manifolds. And the world had to face a credit deficiency. 

Clearinghouses were deployed for OTC trades’ post-processing. It was among the most effective measures during the credit crunch. 

OTC network 

Market makers’ networks are instrumental in carrying out the OTC trading of stocks in the United States. FINRA (Financial Industry Regulation Authority) and OTC Markets Group are two renowned regulatory bodies. Participating market dealers receive quotations from these networks. Dealers use a phone call or an online medium to execute traders.

Major pros and cons of OTC markets 

Pros 

  • Penny stocks and unlisted companies have the biggest benefits here as they garner significant capital from the market for growing further.
  • Enormous returns on investment are available to speculative investors. 
  • Due to less or casual regulation on OTC markets, several companies get the entry here that cannot trade through exchanges.
  • Accessing securities like derivatives, ADRs, and bonds are easy on OTC markets. However, they are not available on standard exchanges. 

Cons

  • OTC stocks are prone to make unforeseen moves that can harm investors’ investments during economic data release. 
  • Due to a lack of transparency, there’s very little information available regarding companies. Thus, traders are prone to risk. They can be robbed off of their funds. Thus, the possibility of fraud increases. 
  • The trading liquidity is less here. So, investors may find it challenging to decide when to sell or buy. 
  • Sometimes, low volumes or lack of buyers can cause losses to sellers. 

Security buying on the OTC Market? 

A trader needs to identify the security of choice before buying it on the OTC market. Also, it is necessary to acknowledge the amount you need to invest in the market. One needs to accumulate information regarding the security available through sone markets. 

After that, you need to pick a broker that is trusted and trade your OTC security. For example, it can be Global TradeATF, ABinvesting, Brokereo, and InvestLite. 

Any broker that sells securities listed on exchanges also sells OTC securities. So, once you get a broker and account set up in place, fund it with the amount you can afford and buy your OTC security. 

The trade can be initiated electronically via a broker’s platform or through a phone call. 

What is a stock market? 

A stock market is a platform where shares of publicly listed companies are issued and traded through an exchange regularly, five days a week. It is a collection of different stock exchanges and markets where traders buy and sell their stocks while companies issue them using an initial public offering (IPO). Meanwhile, such financial activities or functionings are conducted through OTC (Over counter) marketplaces or institutionalised formal exchanges. These work under a set of guidelines and regulations. 

A country can have plenty of venues for trading stock exchanges. A stock exchange helps in trading other securities along with stocks. 

Primary market: It is the market where companies float their shares in the form of IPOs for raising capital. 

Secondary market: It is the market where securities get traded once they are sold in the primary market. Here one trader or individual buys shares from another one and sells ahead for earning profits. Shares are sold and bought at the market price on the mutual agreement of buyers and sellers. Regulatory authorities regulate these markets for the safety of traders. 

What are stocks?

A stock is a security or instrument representing the fraction of ownership of a publicly listed company. It exhibits the proportional claim of an individual or a company over assets and profits. 

So, shares are a representation of a fraction or a slice of ownership by an investor against the total number of shares of a company available in the market. So, if a company lets out 100000 shares and a person holds 20000 out of that, it means he/she has 20 per cent ownership over the company. Depending upon the approach of companies, the outstanding shares can run in millions to billions. 

Understanding stock markets 

The stock market is an ocean where investors want to invest their money for decent to heavy returns. However, some market participants feel scared while putting their money due to the fear of losing money. But it is prevalent for those who are new to the trading world. There are susceptibilities and vulnerabilities that go away with time. So, it is the experience and strategies that help traders salvage from any loss. 

Trading in stocks requires discipline and knowledge about companies that you are investing your money into. You need to know the fundamentals and technical aspects before investing. So, it provides space for creating a net worth. Anyone who has enough money, will and the enthusiasm to earn can succeed in the market. 

It requires research and study of the market before the investment. If you can probe about a stock effectively, check its history and future prospects, and trading becomes easier. So, it is important to learn before you invest. Anyone who initiates trading imitating their successful friends without knowledge is bound to lose funds. 

So, you can’t succeed in the stock market trading based on a fluke, It requires you to be smart and most importantly vigilant. Stock markets have several companies listed 

What do shares or equities signify?

The shares or equities signify the ownership of shareholders in a company. It represents the ownership of a shareholder. If it is in a bigger number, shareholders can have the voting rights in the companies policy and decision making. Also, they receive the residual claim on earnings through dividends and gains. 

What is the listing of shares?

When a company finds its foundation and does well, the next ambition is to make it bigger. Thus, it requires larger capital for investment. That is important for fulfilling the commitments and funding future projects. However, everything is not possible through bank loans because there’s a limit to that, plus the huge debt can create potential losses. So, companies take a more straightforward route of launching initial public offerings. It provides direct participation of the public in the market. 

So, if a company does well, stakeholders will make money and vice-versa. Once the firm goes for IPO, it becomes a publicly listed one from a private company. Once the company’s status changes, it brings in bigger capital that gives new wings to experiment. Moreover, IPO also offers an opportunity to investors to cash out some of their investments. So, if a company is bigger already, it will reap greater rewards. 

Once the listing is done, other market players come into the picture and traders, and other companies scrutinise that company. Now, the market prices fluctuate depending on the demand and supply and performance. In addition, the news reports, economies, and other factors, directly and indirectly, impact a stock’s price growth when it gets listed. 

Moreover, natural calamities, wars, trade deficits, and public sentiments that result in bearish and bullish markets ensure what the stock prices will be. 

What is bull and bear markets? 

A bull market happens when all traders collectively think of buying stocks. It is a confident zone that works as a wave for different stocks and takes the valuation to the next level. Even penny stocks start gaining momentum and funds more than the anticipation. Investors are in a mood to buy anything. The period of buying extends for a longer time.

Whereas the bearish market is marred with negative sentiments, where traders are doubtful of their investments. So, the market sees a steep fall. Everyone is in the mood of selling their shares. 

Which are the top stock markets? 

Some of the top stock markets globally are:- 

  • NYSE aka New York Stock Exchange
  • Japan Exchange Group
  • London Stock Exchange
  • Toronto Stock Exchange
  • Shanghai Stock Exchange
  • Korea Exchange
  • Bombay Stock Exchange
  • Euronext
  • Nasdaq
  • National Stock Exchange 
  • Shenzhen Stock Exchange
  • Hong Kong Stock Exchange 
  • Taiwan Stock Exchange 

Interesting facts about the stock markets

The overall market capitalisation of stock markets as of 31 December 2019 reached USD 70.75 trillion. On the other hand, the market cap of equity-based securities hiked to USD 83.53 trillion from USD2.5 trillion in 1980. As of 2016, there were around 60 stock exchanges worldwide. 

Conclusion: 

Both Over the counter market (OTC) and stock markets offer an opportunity to a trader and company to excel in their respective fields. The activity of stocks is related to money-making. So, accumulating wealth through shares is the motto on both ends. It requires a broker that can help traders to pitch their bids. ABinvesting, TradedWell, and others are offering those opportunities. 

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