Want to invest in small company stocks but can't find a way? Learn about the OTC over-the-counter trading market.

Investors often encounter the following dilemma: discovering a promising emerging enterprise or small to medium-sized company, yet unable to find its trading products on mainstream exchanges. At this point, understanding the OTC (Over The Counter) market becomes essential. OTC trading offers more diverse investment options and flexible trading methods, but also comes with corresponding risks. How can one correctly understand and participate in OTC trading?

How is OTC Defined

OTC stands for Over The Counter, referring to transactions that do not occur on centralized markets (such as securities exchanges), but through dispersed channels. Investors may directly buy and sell with counterparties via banks, brokerages, or through phone and electronic systems. This is why some call it “over-the-counter trading” or “OTC trading.”

Unlike the unified pricing system of centralized markets, OTC prices are negotiated directly between buyers and sellers. Counterparties can be banks, securities firms, corporations, or individual investors. Many small and medium-sized enterprises or startups that do not meet listing requirements choose OTC trading. Some companies, even if qualified for listing, prefer to stay in the OTC market to avoid excessive disclosure of information.

With the development of the internet, the OTC market has expanded continuously. Traders provide more diversified products and services under relatively relaxed regulatory environments, meeting investors’ demands for convenience and accessibility. However, compared to the regulated nature of on-exchange trading, OTC prices are less transparent, and the lack of strict trading rules and oversight means that trading parties bear higher credit risks.

OTC Stocks and Other OTC Products

The range of OTC products is quite extensive, far exceeding what centralized exchanges can offer:

Stocks — Besides listed stocks, OTC markets include many stocks of small and medium-sized enterprises and startups that do not meet listing criteria or have not applied for listing. This is the largest investment market within OTC.

Bonds — Due to large issuance volumes, diverse types, and infrequent trading, OTC markets are more suitable for bond trading compared to on-exchange markets.

Derivatives — Contracts such as options, futures, and spread contracts can all be traded OTC.

Foreign Exchange — Currency trading on various platforms falls under OTC scope.

Cryptocurrencies — OTC markets can facilitate large one-time purchases of cryptocurrencies, which are difficult to achieve on dedicated crypto exchanges.

Taiwan’s OTC Market and Matching Mechanism

Taiwan’s stock market is divided into two tiers: the Stock Exchange and the OTC (Gretai) market. The OTC index (also called the OTC Market Index) reflects the overall condition of Taiwan’s OTC stock market. Many investors observe this index to gauge the trend of small and medium-sized stocks.

The government established the OTC Center to balance regulation and development: while listing and OTC listing conditions are strict, overly harsh requirements could hinder startup growth. The OTC Center relaxes listing criteria—companies only need recommendations from more than two qualified brokers to list, and if they show significant improvement within six months, they can apply for transfer to the main or OTC market.

However, the lower entry threshold also brings concerns. Besides genuine promising companies lacking funds, some fraudulent companies or unscrupulous brokers may promote high-risk targets to exploit investors. Therefore, beyond selecting targets, investors must carefully assess the credibility of brokers.

OTC Stock Matching Process and Rules:

Investor places order via broker → Order uploaded to OTC Center’s automatic matching system (ATS) → Matched based on price priority and time priority → Transaction executed

• Pre-market session: 08:30–09:00
• Normal trading hours: 09:00–13:30
• Post-market pricing: 13:40–14:30
• Matching interval: Every 5 seconds for call auction
• Price fluctuation limit: ±10% (same as listed stocks)
• Settlement system: T+2 (identical to listed stocks)

The overall operation and trading rules are synchronized with the main market, requiring no additional steps or special features from investors. OTC listed companies must comply with disclosure regulations, including quarterly and annual reports and major news, providing higher transparency than the emerging OTC market.

Core Differences Between On-Exchange and OTC Trading

Product Standardization — On-exchange trading is like exchanging at a bank with uniform standards; OTC trading is like pawning at a pawnshop—each transaction varies, but the variety of tradable products is broader.

Trading Mode — On-exchange uses transparent call auctions, which are fair but offer less profit margin. OTC uses negotiation, where buyers and sellers agree on prices, making information more critical than capital.

Regulatory Transparency — On-exchange markets are government-approved and fully regulated. OTC markets are operated by brokers, many of which are less regulated, so investors should choose government-approved and regulated platforms for safety.

Liquidity — Centralized exchanges have high trading volume and liquidity, attracting international funds; OTC markets have lower volume and liquidity, making it harder to execute at desired prices.

Advantages of OTC Over-the-Counter Trading

✔️ More Investment Options — Investors can access products unavailable on exchanges, such as derivatives, CFDs, foreign exchange, and more, broadening market choices.

✔️ More Flexible Trading Methods — Diverse product specifications and trading styles allow for customized trading aligned with individual investment goals, unconstrained by exchange rules.

✔️ Higher Leverage Flexibility — Traditional markets have limited and regulated leverage; OTC offers various options, enabling investors to amplify gains with higher leverage.

✔️ Gradual Security Improvements — Modern OTC markets are increasingly optimized with layered security designs and centralized market proximity. Some reputable brokers are authorized and regulated by well-known financial institutions, providing more professional services.

Risks of OTC Over-the-Counter Trading

❌ Lack of Unified Regulation — OTC markets lack standardized rules and transparency, with looser legal oversight, leading to potential fraud by unscrupulous brokers. Listed companies and securities on exchanges must follow strict regulations, whereas many unqualified companies and securities trade OTC.

❌ Liquidity Risk — OTC securities have much lower liquidity than centralized exchanges, making it difficult to execute trades at desired prices quickly.

❌ Market Volatility Risk — OTC trading is affected by market fluctuations, but investors lack the transparent information available on exchanges, increasing difficulty in risk assessment.

❌ Counterparty Risk — Without a unified market and rules, sellers may quote different prices to different buyers, facing credit risk. Some products are highly volatile and illiquid, increasing risk.

❌ Scam Risk — There are malicious actors using false information to deceive investors into trading.

Key to Ensuring Safe OTC Transactions

To reduce OTC trading risks, investors should follow these principles:

First, verify broker safety — Choose brokers regulated by authorities with strong risk management, which is the most fundamental requirement.

Second, select mature trading products — Prioritize products with long trading histories and many participants (e.g., forex), and thoroughly understand their spreads, liquidity, and other details.

Third, utilize platform protection measures — Reputable platforms often provide risk assessments, KYC procedures, complaint mechanisms, and investor protections to lower risks.

Fourth, carefully choose trading counterparties — When possible, learn about the background and creditworthiness of counterparties to avoid dealing with untrustworthy entities.

Summary

The OTC over-the-counter market opens more doors for investors, offering investment opportunities that on-exchange markets cannot meet. Whether investors seek growth in small and medium-sized enterprises or professional traders want customized trading, OTC markets hold value.

However, OTC trading also involves higher risks. Lack of unified regulation, lower transparency, and limited liquidity are issues that require thorough understanding before participation. By selecting legitimate brokers, choosing mature products, and understanding market mechanisms, investors can find opportunities within OTC stocks and OTC markets while managing risks. The key is—avoid blindly following trends, do thorough research before acting.