Recently, while researching some small and medium-sized stocks, I found that many great companies simply cannot be found on mainstream exchanges. Later, I realized that these companies are traded in the OTC over-the-counter market. I think this is a topic worth discussing in depth, because many investors still have misunderstandings about over-the-counter trading.

First, we need to clarify what OTC is. Simply put, OTC means over-the-counter trading: investors do not trade on centralized markets such as stock exchanges. Instead, they buy and sell securities directly through banks, brokers, phone calls, or electronic systems. Taiwan’s OTC Bulletin Board is a typical example of an OTC market, and many small and medium-sized enterprises and startups are listed there.

Why do OTC markets exist? In short, it’s because the listing requirements are too strict. To protect investors, the government sets a lot of requirements for listed companies, but this ends up keeping many promising startups out. As a result, there is a relatively more flexible market—OTC. As long as the company is recommended by more than two sponsoring brokers, it can enter the market. This not only helps companies raise funds, but also gives investors more choices.

I noticed that the differences between OTC and on-exchange trading are fairly significant. On-exchange trading uses centralized matching (open call auction), where everyone sees the same price. OTC trading, on the other hand, has the buyer and seller negotiate the price. The same stock can be sold to different people at different prices. That’s also why information is especially important in OTC markets—the more you know, the better prices you can negotiate.

The range of products that OTC markets can trade is also more diverse. In addition to small-cap stocks, there are foreign exchange, cryptocurrencies, derivatives, and more. Especially for cryptocurrencies, OTC trading allows you to purchase large quantities of assets at once—something that is often hard to achieve in dedicated crypto markets. Moreover, the trading methods are more flexible: there are more leverage options, you can short-sell, and risk-control constraints are generally looser than on-exchange trading.

That said, OTC over-the-counter trading does involve risks, and this cannot be ignored. Because regulation is relatively less strict, it can attract bad actors. Liquidity is also weaker than on exchanges. Sometimes you want to exit, but there is no counterparty. Also, because these companies are generally smaller, their stock prices tend to fluctuate more than those of listed companies, making them more vulnerable to changes in news and information.

So the key is to choose the right broker. You should definitely find a platform with legitimate regulatory licenses and high standards of risk control. Taiwanese investors trading OTC should also be cautious. Although the trading rules are the same as those in the listed market (centralized matching, price limits, T+2 settlement), because companies are usually weaker in fundamentals, they are more susceptible to manipulation by shareholding interests. Therefore, you need to be especially careful when investing.

When I trade OTC over-the-counter now, I prioritize platforms with international regulatory licenses and well-developed investor protection mechanisms. This at least provides assurance in terms of safety, so I can focus on analyzing the underlying assets themselves. For investors who want to enter the OTC market, choosing a good platform, doing your homework, and controlling risks are the keys to long-term profitability.