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  Sunday December 9, 2018

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The over-the-counter, or OTC, market is part of the secondary market for securities -- i.e., where securities are traded after they have been issued by companies or governments.

The OTC market is sometimes called the negotiated market because, unlike exchanges, where securities are sold through outcry auctioning, trades on the OTC market are negotiated directly between buyers and sellers, usually over the telephone or through a computer network.

The difference is an important one. When a trade happens on the floor of an exchange, everyone in the trading area (and soon, people all over the world) knows the number of shares that changed hands and the price that was paid for them. With negotiated trading, limited information is available about what price a share is commanding in the market at that moment, and there is usually a greater time delay. Many investment experts believe this makes auction trading more immediately sensitive to market pressures.

OTC trading takes place among brokers, who arrange transactions between buyers and sellers, and dealers, people and firms in the securities business that own securities and trade for their own accounts.

Dealers quote two prices for a security: the bid price, which is the highest price a dealer will pay for a share of a security, and the asked price, the lowest price the dealer is willing to sell a share of the security for.

The two prices together constitute the dealer's quotation on that security, and the difference between the two is called the spread. Brokers and dealers negotiate the actual price on any transaction in the spread between bid and asked prices.

In addition to differences in the way securities are traded, there are some distinctions between the OTC market and exchanges in the kinds of securities traded. We will discuss those differences next.


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