What is the OTC Market - A Detailed Guide for Investors Wanting to Trade OTC

Beyond the official exchanges like HOSE, HNX, or Upcom, the financial world also exists with a powerful parallel market called the OTC market. This is a less noticed sector but contains many potential opportunities for business-minded investors.

What Is OTC? Basic Concepts of the OTC Trading Market

OTC stands for “Over-the-counter,” meaning “Trading at the counter.” The essence of the OTC market is a decentralized marketplace where transactions do not occur at a fixed location but through various channels such as bank trading desks, securities companies, phone, email, or online.

The price-setting mechanism in the OTC market is entirely different from traditional exchanges. Instead of a unified price announced by the exchange, OTC transactions are valued through direct negotiation between buyer and seller. This creates a flexible and independent trading environment.

In Vietnam, the OTC market is also called by different names such as: network market, free stock market, or electronic quotation market. OTC activities operate through a complex network including brokers, investors, information systems, online communities, and industry forums.

Unlike centralized exchanges with strict management systems from a main organization, the OTC market operates based on mutual agreement among participants. However, in recent years, this market has developed and become quite professional, with some OTC platforms licensed and supervised by reputable financial authorities.

Detailed Comparison: OTC Market and Centralized Stock Exchange

To better understand the differences between OTC trading and traditional exchange trading, here is a detailed comparison table:

Main Advantages of OTC Trading

✔️ Opening Up Diverse Investment Opportunities

Compared to traditional exchanges, the OTC market offers investors a much broader range of options. Besides stocks, investors can access products like derivatives, CFDs, options… which are not fully available on domestic platforms.

In traditional markets, investors are only allowed to trade listed stocks or VN30 index futures. Conversely, in the OTC market, you can diversify your portfolio with various asset types, thereby reducing concentration risk.

✔️ Strong Support from Derivative Products for the Existing Market

The development of derivative products on OTC has proven its necessity and effectiveness. Taking Bitcoin as an example, since the emergence of Bitcoin derivatives in 2017, their value has increased significantly, accounting for over 30% of Bitcoin’s total market capitalization.

Data from Crypto Compare shows that in June 2021, Bitcoin derivative trading volume even surpassed Bitcoin spot trading volume. This trend reflects the increasing attraction of derivative tools in the OTC market.

✔️ Continuous Safety and Security Improvements

Modern OTC markets have been highly optimized, fully automated, and apply multiple layers of security similar to centralized markets. Some OTC platforms licensed by reputable financial authorities help ensure safety for investors.

✔️ Using Leverage to Amplify Profits

On traditional exchanges like HOSE or HNX, investors can only be granted a maximum leverage of 2x, and many securities companies do not offer leverage for unlisted stocks.

In contrast, OTC markets allow investors to use very high leverage (from 10 times up to hundreds of times depending on the product), enabling profit amplification. However, high leverage also carries high risks, so it must be used cautiously.

The OTC Market Situation in Vietnam

According to data from the General Statistics Office of Vietnam, by the end of 2020, the country had about 683,600 active enterprises. However, only 1,575 companies had stocks traded on the three main exchanges (HOSE, HNX, Upcom), accounting for just 0.2%.

This low figure highlights the importance of the OTC market. It is a financial gateway for thousands of other companies to raise capital without meeting the strict requirements of centralized exchanges. Some large Vietnamese companies still choose to trade on the OTC market.

Although the domestic OTC market has experienced volatility, OTC stocks remain an attractive investment channel with high returns. Currently, this market is becoming increasingly professional, operating on both websites and mobile apps, managed no less than centralized exchanges.

Major OTC platforms in Vietnam such as SanOTC, VN-Direct, Vietstock provide diverse OTC stock information with stable activity. However, these platforms mainly focus on domestic OTC stocks and have not yet offered international products.

Risks of OTC Trading and How to Avoid Them

☀️ Avoid Trading Low Liquidity Assets

Stocks or assets with low trading volume pose liquidity risks. When no counterparty can be found, you may find it difficult to sell or buy that asset. This can lead to capital lock-in or inability to recover funds in time.

☀️ Diversify Your Investment Portfolio - Don’t Put All Eggs in One Basket

The golden rule of investing is risk diversification. Instead of putting all capital into a single product, allocate funds across various assets. This strategy helps reduce systemic risk and protects your assets.

☀️ Use Leverage Wisely

Leverage is a double-edged sword. It can help you make money quickly but can also cause rapid losses if the market moves against your prediction. Use leverage only when you understand the trading products well, have a solid risk management plan, and do not overuse beyond your capacity.

The OTC market is an important financial sector, offering many opportunities as well as risks. Understanding how OTC trading works, mastering knowledge, and applying risk management strategies will help you maximize the benefits this market provides.