Pros and cons of OTC trading
Pros of OTC trading
The most popular OTC market is forex, where currencies are bought and sold via a network of banks, instead of on exchanges. This means that forex trading is decentralised and can take place 24 hours a day, rather than being tied to an exchange’s open and close times.
Stocks and other financial instruments can also be traded OTC – this includes derivatives such as swaps and forward contracts.
OTC trading gives companies that don’t meet stock exchange requirements the opportunity to raise capital, which can help fund expansion and growth. Shares that are traded OTC tend to be cheaper than those listed on a centralised exchange. As a result, you can buy a lot of shares for a small amount of capital.
OTC trades have greater flexibility when compared to their more regulated and standardised exchange-based counterparts. This means that you can create agreements that are specific to your trading goals.
Cons of OTC trading
The unregulated nature of OTC trading means that there is a higher risk of a counterparty defaulting on any given agreement. This is particularly true for swaps and forward contracts.
Trading stocks OTC can be considered risky as the companies do not need to supply as much information as exchange-listed companies do. This means that companies can often claim to be ‘up and coming’ which is not always the case.