It is contrasted with exchange trading , which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity , mitigates credit risk concerning the default of one party in the transaction, provides transparency , and maintains the current market price.
In an OTC trade, the price is not necessarily published for the public.. OTC trading, as well as exchange trading, occurs with commodities , financial instruments including stocks , and derivatives of such products. Products traded on the exchange must be well standardized. This means that exchanged deliverables match a narrow range of quantity, quality, and identity which is defined by the exchange and identical to all transactions of that product.
This is necessary for there to be transparency in trading. The OTC market does not have this limitation. They may agree on an unusual quantity, for example. The OTC derivative market is significant in some asset classes: In approximately 16 percent of all U. Although exchange-listed stocks can be traded OTC on the third market , it is rarely the case. Usually OTC stocks are not listed nor traded on exchanges, and vice versa.
Other OTC stocks have no reporting requirements, for example Pink Sheets securities and "gray market" stocks. Some companies, with Wal-Mart as one of the largest,  began trading as OTC stocks and eventually upgraded to a listing on fully regulated market.
By Wal-Mart Stores Inc. An over-the-counter is a bilateral contract in which two parties or their brokers or bankers as intermediaries agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly.
Forwards and swaps are prime examples of such contracts. It is mostly done online or by telephone. For derivatives , these agreements are usually governed by an International Swaps and Derivatives Association agreement.
Over-the-counter derivatives are especially important for hedging risk in that they can be used to create a "perfect hedge. With OTC derivatives, though, a firm can tailor the contract specifications to best suit its risk exposure. OTC derivatives can lead to significant risks. Especially counterparty risk has gained particular emphasis due to the credit crisis in Counterparty risk is the risk that a counterparty in a derivatives transaction will default prior to expiration of the trade and will not make the current and future payments required by the contract.
One of them focuses on controlling credit exposure with diversification , netting , collateralisation and hedging. OTC derivatives are significant part of the world of global finance. The OTC derivatives markets grew exponentially from through This expansion has been driven by interest rate products, foreign exchange instruments and credit default swaps. In their paper by Schinasi et al. At that time prior to the financial crisis of , the OTC market was an informal network of bilateral counterparty relationships and dynamic, time-varying credit exposures whose size and distribution tied to important asset markets.
International financial institutions increasingly nurtured the ability to profit from OTC derivatives activities and financial markets participants benefitted from them. In the authors acknowledged that the growth in OTC transactions "in many ways made possible, the modernization of commercial and investment banking and the globalization of finance. The NYMEX has created a clearing mechanism for a slate of commonly traded OTC energy derivatives which allows counterparties of many bilateral OTC transactions to mutually agree to transfer the trade to ClearPort, the exchange's clearing house, thus eliminating credit and performance risk of the initial OTC transaction counterparts.
From Wikipedia, the free encyclopedia. The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject.
You may improve this article , discuss the issue on the talk page , or create a new article , as appropriate. January Learn how and when to remove this template message. Derivatives Credit derivative Futures exchange Hybrid security.
Foreign exchange Currency Exchange rate. Monetary and Economic Department November , "Statistical release: September , International Capital Markets: Primary market Secondary market Third market Fourth market. Common stock Golden share Preferred stock Restricted stock Tracking stock. Authorised capital Issued shares Shares outstanding Treasury stock.
Electronic communication network List of stock exchanges Opening times Multilateral trading facility Over-the-counter. Alpha Arbitrage pricing theory Beta Bid—ask spread Book value Capital asset pricing model Capital market line Dividend discount model Dividend yield Earnings per share Earnings yield Net asset value Security characteristic line Security market line T-model.
Algorithmic trading Buy and hold Contrarian investing Day trading Dollar cost averaging Efficient-market hypothesis Fundamental analysis Growth stock Market timing Modern portfolio theory Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory Random walk hypothesis Sector rotation Style investing Swing trading Technical analysis Trend following Value investing. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative.
Financial risk and financial risk management. Concentration risk Consumer credit risk Credit derivative Securitization. Operational risk management Legal risk Political risk Reputational risk Valuation risk. Profit risk Settlement risk Systemic risk. Financial economics Investment management Mathematical finance. Retrieved from " https: Financial risk Stock market Derivatives finance Financial markets Electronic trading systems Mathematical finance.