What is OTC Market?

Whenever we think of investing in equity or stock, the first thought that comes to our mind is stock exchange or mutual fund. Almost all big and reputed companies are listed and traded mainly in stock exchanges like NSE and BSE. But apart from them, there are some companies which have a lot of potential and scope but due to various reasons are not able to get listed in the stock exchange. So here the question arises that is there any such platform through which we can invest in these companies? The answer to this question is yes and we know the same platform as OTC. Let us try to understand the entire concept of OTC market through our article below.

What is OTC market?

OTC means Over the counter.

OTC (Over-the-Counter) in India is a market where securities such as stocks, bonds, derivatives etc. are bought and sold directly between two parties without any formal stock exchange. Here the transaction takes place directly without any middleman. Most of the unlisted securities in this market, i.e. those securities which are not listed in the stock exchange, are traded through the network of brokers and dealers. Unlike the stock market, it is a decentralized market and all the transactions taking place in this market are also supervised by regulatory bodies. However, the regulation in this is less as compared to traditional stock exchanges.

How OTC market works?

The way the OTC market works is similar to that of a normal stock exchange. The only difference is that here we do not buy the security from the stock exchange but directly from the company. Like the stock market, here too we cannot do any dealing directly. For this we need brokers and dealers and all types of transactions are completed through them. OTC works as a secondary market for shares of private companies including bonds and debentures etc. The people who play

key roles in carrying out transactions in the OTC market are:

Broker: Broker means those people who work as middlemen between buyer and seller. In return they charge some fees or brokerage.

Market Maker: Market makers are those people who ensure that all the securities traded in the OTC market are available to everyone at the right price and right quantity.

Custodian: The work of the custodian is related to administration, which mainly takes care of security clearance and documentation.

Transfer Agent: He takes care of the transfer and allotment of all the transactions taking place in the OTC market.

Types of OTC market

Securities traded in the OTC market are divided into three parts according to their financial condition. It has three parts:

The Best Market: This includes those companies whose financial position is quite good and which have a good reputation in the market. These are not listed in the stock exchange only due to regulatory reasons, but if investment is made in them, there is a lot of possibility of getting good returns from them.

The Venture Market: Venture Market includes companies which are new and are still in the development stage. There are fewer restrictions and rules for listing in the OTC market as compared to the stock exchange, hence these companies are able to trade here.

The Pink Market: The Pink Market is the riskiest part of the OTC market. In this section, those companies are traded whose financial records are very bad or penny stocks or very small companies. The possibility of fraud and risk is very high in these.

How to invest in OTC market?

We can also call OTC market as OTC exchange like stock exchange. Like the stock exchange, you cannot invest directly in the OTC market. For this you have to take the help of brokers and dealers. These brokers and dealers put their price or bid to buy a security. We can divide the brokers working in OTC market into two parts:

Full Service Brokers: These brokers help you to invest in any security in OTC exchange. Apart from this, it also helps in managing your portfolio, giving you financial advice and rebalancing your portfolio. In return, they can charge you some fees or earn their commission in the form of brokerage.

Discount Brokers: Discount brokers do not provide you any kind of investment advice or manage your portfolio. Their main objective is to provide you a platform where you can trade and invest in securities. Here it must be kept in mind that not all discount brokers provide this facility, hence if you are thinking of investing in OTC market securities through a discount broker, then first of all check about all the services offered by it. .

Difference between Stock Exchange and OTC market – Stock Exchange vs OTC market

Stock Exchange	OTC Market
It is a centralized market where investing and trading is done in securities listed on the exchange.	Here two parties, buyer and seller, trade directly through brokers.
It is strictly regulated by SEBI.	There is less regulation in these compared to stock exchanges.
We can trade only in those securities which are listed on the exchange.	Here the security does not need to be listed.
Liquidity is very high here, which means we can buy or sell any stock anytime without any hassle.	There is lack of liquidity in the OTC market as compared to the stock exchange.

Importance of OTC market

OTC market plays an important role in the Indian and global financial system in many ways. It acts as a secondary market for shares and many other securities such as bonds, debentures, derivatives and commodities.

As investors, we also get the opportunity to invest in those companies which have good potential but are not publicly traded. By investing and trading in these, we can increase our profits and returns manifold.

The price of securities listed in the OTC market is mostly lower than that of stocks on the stock exchange. Those investors who have limited capital can invest their money in good unlisted companies through OTC market.

Due to the diversity of listed securities of the OTC market, we also get the opportunity to diversify our portfolio and generate a good return from it.

Risks of OTC market

There is less liquidity in the OTC market compared to the stock exchange. Due to low liquidity, the securities traded in it can be quite volatile which can cause more risk and loss for the investor.

Due to lack of regulation in the OTC market, the possibility of risk and fraud increases to a great extent.
There is a lack of transparency in the financial records of companies traded and exchanged in the OTC market. Unlike the stock exchange, where as per the guidelines of SEBI, a company is required to keep all the decisions and records related to its management in front of the general public, the companies in the OTC market are not bound to do all these things, hence investors face difficulty in analyzing them. may have to.

Conclusion

OTC market plays an important role in the Indian and global financial system. It can be invested in many securities including unlisted stocks. Although this market is also regulated, still to some extent it involves more risk than the stock market. As an investor, we must do proper research with our financial advisor or ourselves before investing in any security traded in this market.