Recently, I’ve seen a lot of people in the community asking what OTC is. I found that many beginner investors still have a pretty unclear understanding of the concept of over-the-counter trading, so I decided to organize my understanding.

Simply put, OTC is over-the-counter trading, also called off-exchange trading. You’ve probably heard terms like main board listing and ChiNext—those are transactions carried out on centralized exchanges. But some companies, because they’re too small or don’t want to meet the strict requirements for listing, choose to trade off-exchange instead. These companies are usually small to medium-sized enterprises or startups. They may have good potential, but they haven’t yet reached the listing threshold.

What are the core characteristics of OTC trading? It’s that the buy and sell sides directly negotiate the price, unlike centralized exchanges that use a unified order-matching system. You can agree on a price with the other party and then complete the trade—and this is also why it’s called negotiated trading. Because of this flexibility, off-exchange trading products are very diverse: stocks, bonds, foreign exchange, cryptocurrencies, and derivatives can all be traded here.

Taking Taiwan as an example, the government has established the OTC Center to manage the OTC market. Companies only need recommendations from more than 2 advising brokers to be listed. Compared with the strict requirements for listing, it’s indeed much more relaxed. This design is intended to give companies that have potential but aren’t large enough a chance for financing and growth. Taiwan’s OTC index reflects this market’s barometer. Many investors use this index to judge the trends of small and medium-sized stocks.

However, the point I want to make here is that although the OTC market offers many opportunities, risks do exist as well. Because regulation is relatively less strict and information transparency is not as good as on centralized exchanges, it’s hard to avoid some bad actors getting mixed in. In addition, liquidity is usually lower—so the stock you buy may not be easy to sell, or the selling price may not be ideal.

From my own experience, if you want to participate in over-the-counter trading, first you need to choose the right platform—make sure you find a broker under proper regulation. Second, choose mature trading products, such as forex and mainstream cryptocurrencies. At least, there should be many market participants, and liquidity should be relatively better. Third, do your homework and understand the details of the asset you plan to trade, including its characteristics, the spread, the withdrawal mechanism, and other key factors.

Compared with centralized exchanges, the biggest advantage of over-the-counter trading is flexibility and variety. You can trade stocks of companies that haven’t been listed yet, use higher leverage, and enjoy more diverse trading methods. But behind these advantages, there are indeed higher risks. So the most important point about OTC trading is that it requires investors to have a stronger risk awareness and market knowledge. Only by choosing the right platform, choosing the right assets, and controlling risk can you find opportunities in the over-the-counter market.