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The phrase "over the counter" (OTC) in finance designates a decentralized market where financial assets, such as stocks, bonds, currencies, and derivatives, are traded directly between two individuals without the oversight of a regulated exchange.
Instead of going through an exchange or middleman, buyers and sellers bargain pricing and other terms of the transaction directly with one another in an OTC market. As a result, the conditions of the transaction are more flexible, and financial instruments can be tailored to satisfy certain requirements.
Financial items like derivatives, which might not be traded on regulated exchanges, that are less standardized or less liquid are often traded on OTC markets. OTC markets offer a forum for trading tiny or privately held assets that would not satisfy an exchange's listing standards.
OTC trading has several advantages, one of which is that it allows for more privacy and confidentiality in the transaction because there is no public market where prices are listed and transactions are recorded. For high-net-worth individuals or institutional investors who might want to keep their trading activity private, this can be very crucial.
OTC trading can be risky, especially for retail investors who do not have access to as much information or protection as in established exchanges. In OTC markets, there is also a risk called counterparty risk, which refers to the possibility that the other party won't carry out their end of the bargain.
