What Are OTC Stocks? A Comprehensive Guide for Beginners

Decoding the Concept of OTC - The Decentralized Trading Market

When discussing stock investment in Vietnam, most people think of major exchanges like HOSE or HNX. However, alongside these exchanges, there exists another market that is rapidly developing - (Over-The-Counter) market, also known as the over-the-counter trading market.

What is OTC stocks? Simply put, these are securities traded outside the official exchanges. Instead of going through a centralized trading system, investors negotiate directly with each other through various channels — which could be at the brokerage firm’s counter, banks, or even via online platforms and phone.

The essence of OTC stocks is in the flexible pricing mechanism. Instead of prices being determined by an automatic matching system, trading parties negotiate and agree on a price level. This provides great flexibility but also carries higher risks.

How Does the OTC Market Operate?

Unlike the operation of HOSE or HNX, the OTC market does not rely on a fixed location or a single matching system. Instead, it operates through a broad network including brokers, investors, financial information systems, online communities, and specialized forums.

On this market, brokers act both as liquidity providers and as market makers. They not only help connect buyers and sellers but also actively buy or sell securities from their own portfolios to create liquidity for the market.

Initially, what is OTC stocks was considered a secondary market, mainly to facilitate trading of securities not eligible for listing on the main exchanges. But today, it has evolved into a complete market with modern infrastructure, managed by professional brokers and adhering to international standards.

Comparison: OTC vs. Traditional Exchanges

To better understand the position of what OTC stocks are within the financial system, we need to compare it with centralized exchanges:

Trading hours: HOSE and HNX operate within fixed hours — HOSE from 9:00 to 14:45 (Monday to Friday), HNX from 9:00 to 15:00 (on the same days). In contrast, the OTC market can operate 24/7, allowing investors to trade anytime depending on their needs.

Types of securities: While official exchanges only trade listed stocks and futures contracts, the OTC market offers a wider range of products — from unlisted stocks, derivatives, CFDs, to customized contracts tailored to specific needs.

Flexibility: On the OTC market, contracts can be fully customized according to the participating parties’ requirements, whereas centralized exchanges provide standardized contracts. Additionally, settlement times are more flexible — T+0 can be implemented instead of T+2 as on official exchanges.

Why Do OTC Stocks Attract Investors?

There are many reasons why the OTC market is becoming increasingly popular:

Diverse investment opportunities: The OTC market opens doors for investors wanting access to unlisted assets or special financial products. Instead of only investing in stocks or VN30 futures, investors can participate in derivatives, options, and many other financial instruments.

Growth of derivatives market: Taking Bitcoin as an example, since the launch of Bitcoin derivatives in 2017, the market capitalization of these contracts has surged, accounting for over 30% of the total market value. There have even been times when trading volume of derivatives exceeded direct trading volume, indicating the popularity of these tools.

Improved safety: With technological advancements, modern OTC infrastructure has been optimized, automated, and secured with multiple layers. Major brokers are now licensed and supervised by reputable financial authorities, so safety levels are not much different from centralized exchanges.

Leverage power: The OTC market allows investors to use much higher leverage than traditional exchanges. While HOSE or HNX only offer a maximum of 2x leverage (and sometimes do not provide leverage for unlisted stocks), OTC markets can allow leverage up to hundreds of times, helping investors amplify profits with small capital.

The OTC Market in Vietnam - Current Status and Outlook

According to data from the General Statistics Office, by the end of 2020, Vietnam had about 683.6 million active enterprises. However, only 1,575 companies had the right to list their stocks on the three major exchanges — HOSE, HNX, and Upcom — accounting for just 0.2% of the total. This indicates a significant gap in the stock market.

Therefore, the OTC market plays an important role as an alternative solution. It enables thousands of small and medium-sized enterprises to raise capital without meeting the strict requirements of formal exchanges. Some large companies also choose to keep their stocks in the OTC market instead of listing officially.

In recent years, although the domestic OTC market has cooled down compared to before, OTC stocks remain an attractive investment channel with high returns. The market has grown significantly, expanding onto websites and mobile apps, organized by professional companies adhering to standards comparable to official stock exchanges.

Key Points to Consider When Investing in the OTC Market

Although the OTC market offers many opportunities, it also carries certain risks. Here are some expert recommendations:

Avoid low-liquidity securities: One of the biggest risks in OTC trading is liquidity risk. If a stock has very low trading volume, investors may face difficulties buying or selling, potentially getting stuck with their capital for a long time. Therefore, before investing, carefully check the trading history and liquidity of the securities.

Diversify your portfolio: Do not concentrate all your capital in a single asset or stock. Distribute your investments across various securities to reduce systemic risk. This strategy helps protect your assets if one investment encounters problems.

Use leverage cautiously: While high leverage can quickly multiply profits, it is also a double-edged sword. If the market moves against your expectations, losses will also be magnified proportionally. Therefore, only use leverage when you have a deep understanding of the trading products and a clear risk management plan.

Always stay updated: The OTC market changes rapidly, so investors need to regularly monitor news, market analysis, and new regulations. This will help you make more informed trading decisions.

Conclusion

What OTC stocks are is not just an economic concept; it represents both an opportunity and a challenge for modern investors. With technological development and increased transparency in regulations, the OTC market is increasingly becoming a valid option for those seeking diversification. However, success in this market requires deep knowledge, good risk management skills, and patience in learning and refining your investment strategies.