What is OTC? A Comprehensive Guide to Over-the-Counter Trading Markets for Investors

Discover OTC - The Decentralized Trading Market

Besides major exchanges like HOSE, HNX, or Upcom that investors are familiar with, the financial world also has a rapidly growing market: the OTC market. But what is OTC and how does it differ from traditional exchanges? Let’s explore this special market in detail.

OTC stands for “Over-the-counter” (trading at the counter), a term reflecting the nature of this market. It is a decentralized market where prices are determined through direct negotiation between buyers and sellers, rather than managed by a centralized exchange. In Vietnam, this market is also known by other names such as network market, free stock market, or electronic quotation market.

Characteristics of the OTC Market

Unlike traditional exchanges that require a fixed location, transactions on what is OTC usually occur through a network of brokers, investors, or online platforms via phone, email, and websites. Trading activities are not confined to a specific place, providing greater flexibility for both buyers and sellers.

The operation mechanism of OTC relies on a broad network of agents, brokers, and investors, rather than a fixed trading floor. Participants negotiate and agree on the price of securities or assets before executing the transaction at brokerage or bank counters. Initially, OTC was only a secondary market, but today it has evolved into a sophisticated market managed by professional brokers.

Comparing OTC Market and Centralized Exchanges

To help investors distinguish easily, here are the basic differences:

Advantages of the OTC Market

Diverse Investment Opportunities

The OTC market offers many asset options not available on centralized exchanges. In Vietnam, traditional investors can only invest in stocks or VN30 futures contracts, but OTC provides access to derivatives, CFDs, options, and many other products, optimizing investment portfolios.

Derivative Products Supporting Spot Market

The development of derivative products on OTC has shown strong appeal. Since Bitcoin derivatives contracts launched in 2017, their market value has accounted for over 30% of Bitcoin’s total market capitalization. Data from 2021 shows that derivative trading volume even surpassed spot Bitcoin volume, reflecting the increasing trend of these products on the OTC market.

Enhanced Security Standards

Today’s OTC market has been optimized and automated with multiple layers of security, comparable to centralized exchanges. Many OTC brokers are authorized by reputable financial organizations, so investors can trade with confidence.

Leverage Amplifies Power

One of the most significant advantages of OTC is offering high leverage to amplify profits. While HOSE and HNX only provide a maximum of 2x leverage, and some securities companies do not offer leverage for Upcom stocks, OTC allows investors to use leverage up to hundreds of times.

OTC Market in Vietnam

According to statistics, Vietnam currently has about 683,600 active enterprises, but only 1,575 companies are listed on the three major exchanges (HOSE, HNX, Upcom), accounting for less than 0.2%. This is why the OTC market has become an important capital-raising channel for companies that cannot meet the strict requirements of centralized exchanges.

In recent years, although the domestic OTC market has become less vibrant, it remains an attractive investment channel with high returns. OTC platforms and brokers like SanOTC, VN-Direct, Vietstock have built credibility by providing diverse OTC stock information and stable operations. However, these platforms mainly focus on domestic OTC stocks and have not yet offered international products.

For investors wanting to expand options such as Bitcoin with leverage or OTC stocks from international companies, it is essential to choose reputable, internationally licensed brokers operating in major financial regions.

Risks to Note When Trading on OTC

Although the OTC market offers many opportunities, investors should be aware of potential risks and adopt prudent risk management strategies.

Limited Trading in Low-Volume Stocks

Stocks with very low trading volume pose high liquidity risks. When no counterparty can be found, investors may face difficulties in buying or selling, leading to capital lock-up or inability to recover assets.

Diversify Investment Portfolio

Avoid putting all capital into a single asset. Distributing investments across different assets helps reduce systemic risks, regardless of the market.

Use Leverage Cautiously

While high leverage can quickly increase assets, it can also lead to total loss of capital. Leverage should be used based on the investor’s analysis and experience, avoiding misuse without proper understanding of the products.

Conclusion

What is OTC is simply a decentralized market offering many opportunities but also carrying risks. To trade effectively, investors need to understand its operating mechanism, advantages, and limitations, then make informed and suitable investment decisions based on their capabilities.