WHAT IS OVER-THE-COUNTER TRADING?
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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.
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