The Stock and Bond Markets

Over-the-Counter Markets

A special type of secondary market is the 'over-the-counter (OTC) market'. In contrast to the stock exchange, OTC markets are not physically recognisable: they are better described as networks of trading relationships between dealers. Moreover, unlike exchanges, OTC markets are not subject to strict regulation about the quantity and quality of the assets traded, and all the contracts are bilateral, i.e. only between two parties. Given these characteristics, OTC markets lack transparency compared to the ones discussed so far.

Financial instruments, such as stocks, debt securities, derivatives, and commodities can be traded OTC. Typically, small companies lacking the resources to be listed on formal stock exchanges trade their stocks OTC. However, even larger companies might decide to trade their stocks OTC.