An over-the-counter (OTC) market is a market where trading is done directly between two parties, without any supervision. The difference between OTC markets and exchange markets, is that in exchange markets, trading occurs via exchanges.
Stock exchanges facilitates liquidity, mitigates credit risk of the default of one party in the transaction, and provides transparency. In opposite, in an OTC trade, the price is not necessarily published for the public.
Over-the-counter markets are an important platform for investments because they offer alternatives to just investing in the listed companies on the traditional markets (as IBEX 35). It also gives investors a great opportunity to invest in small or overlooked companies that have a growth potential.
Trading over the counter
OTC markets are not a “place”. They are less formal than a traditional market. Dealers quotes prices at which they will offer stocks or buy to other dealers and to their clients or customers, and they do not necessarily quote the same prices to all customers.
In short, OTC markets are less transparent and operate with fewer rules than do exchanges.
In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements.
One of the most common risks in OTC trades is counterparty risk. Counterparty risk is the risk that a counterparty in a transaction will default before the expiration of the trade and will not make the current and future payments required by the contract.