If you wish to be an expert in trading and earning profits, then it behooves you to acquaint yourself with various trading terminologies. Australians adopt different trading mechanisms including over-the-counter trading to achieve their results, many of which range in methods and effectiveness.
To explain further about over-the-counter trading, this guide will provide a deep insight into how the OTC market works, as well as its various benefits. So, keep on reading!
What Is Over-the-counter Trading?
Also known as OTC trading, over-the-counter trading is a form of decentralized market that involves the direct trading of stocks, currencies, or commodities between two parties without the supervision of a broker or a central authority.
These markets often require no need for physical encounters or locations. Rather, transactions are carried out electronically. In recent times, this trading mechanism has become popular among Australian investors and the market involves dealers taking up the responsibilities of market-makers.
How does the OTC Market work?
The first thing you need to do before you can purchase securities on the over-the-counter market is to identify the particular security you have in mind to buy, as well as the amount you wish to invest. You will find some markets that will provide you with relevant information on the right security you need to consider.
The OTC market is where you can trade securities, which occur outside major exchanges. Over 10,000 securities can be traded on the OTC market. These include bonds, stocks, and exchange-traded funds, among many others.
In contrast to conventional exchanges, including Nasdaq, no physical location is involved in the over-the-counter market. Instead, trades are carried out in decentralized markets.
Companies can still put up their stocks for sale to the public over the counter, despite the fact that OTC securities are not listed with other major exchanges. As a result, an average investor might fail to spot the differences between stocks in the OTC market and securities that are exchange-listed.
For certain securities, the over-the-counter market can be the default exchange. It also represents a possible option for institutions or companies that fail to satisfy certain requirements to list shares on various major exchanges. These requirements could include monthly trading volumes or a number of shareholders.
Why choose and trade in the OTC Market?
The OTC market has become a popular option among Australian investors and indeed across the globe for a wide range of reasons. As a result, it is important to provide an insight into some of these reasons, which are discussed as follows:
OTC markets are characterized by a lower listing requirement than major exchanges
The listing requirements that major exchanges have are often higher than what many companies can or are willing to meet up with. Oftentimes, these include a minimum market capitalization, a specific number of outstanding shares, a particular financial strength level, a minimum price of shares, financial reporting, and more.
Cheaper than many major exchanges
It is no strange fact that companies incur a high cost of trading on a major exchange. This can be as high as $100,000 every year. Naturally, for smaller companies, these fees can account for a large portion of their profits. This makes the OTC market a cheaper option for most companies to consider.
Easier listings for most foreign companies
The additional requirements and expenses have caused many foreign countries to balk at the idea of listing on a major exchange. As a result, listing on the OTC markets exposes them to fewer requirements while ensuring that they can reach investors.
Filing with the SEC may not be required
There are many OTC markets with no requirements for filing financial reports with the SEC.
The OTC markets represent a remarkable option for many Australian investors. Market participants can enjoy greater flexibility, which ensures that they can adjust their strategies to tackle their risk exposure. Besides this, OTC trading can also boost the overall liquidity in financial markets. As a result, OTC markets can help companies – without the means to invest on formal exchanges – gain access to capital.