helping your money make more money
IQInvest

OTC Market

An OTC or over the counter market is one in which trades take place directly between the buyers and sellers rather than through an exchange such as the stock exchange. Exchange trading is the opposite of OTC trading. With exchange trading, the trades take place through a facility or network that has been created to bring buyers and sellers together.

Various different types of financial instruments can be traded on OTC markets. These include stocks, bonds, derivatives and commodities. It is not the types of instruments that are being traded that determines whether or not a market is OTC, it is the way in which they are traded directly between the buyer and the seller.

The OTC market involves the use of OTC contracts. An OTC contract is a bilateral agreement between the buyer and the seller. Both parties make an agreement to settle a specific trade in a certain way, at a specific point in the future. Typically, the parties involved in the contract agreement will be a client and an investment bank.

The trades that are made on the OTC market are mediated by a network of dealers who act as intermediaries between the parties who are buying and selling. Each dealer will have an inventory of securities that they can use to arrange trades between the investors. Each dealer will handle investors who want to buy and sell, using their inventories of securities to find the right trade.

Different types of contracts can be made on the OTC market. Two of the most common types of agreements are swaps and forwards. Swaps are derivatives which involve the exchange of one financial instrument for the financial instrument owned by the other party, for example one bond could be swapped for another bond. Forwards are contracts in which an agreement to trade for a specific price on a specific future date. One party agrees to sell at this price and time, while the other party agrees to buy. These are opposed to spot trades, in which the exchange between the buyer and the seller takes place immediately. Most of the trades that take place on the OTC markets are spot market trades.

When trades are made on the OTC market, they are occurring directly between buyers and sellers rather than through an exchange. The buyers and the sellers are each represented by their own broker or dealer. The brokers negotiate the price at which their client will buy or sell their financial instruments.

An OTC market is a decentralized market in which buyers and sellers can trade securities. Investors can make trades by phone or using the internet, but unlike those trades that take place through an exchange, there is never a physical exchange floor for OTC trades. OTC trades are made directly between buyers and sellers, not through an exchange.

Other types of markets such as the stock or equities exchanges do make use of physical exchanges, although they may also allow trades to be made through other means such as over the internet or on the phone. More information about different types of markets for investment can be found on the iq-invest.biz website.