What is OTC Trading? A Comprehensive Guide to the OTC Market for Beginners

What Is OTC Concept?

OTC stands for “Over-the-counter,” which means “off-exchange trading.” It is a decentralized market where investors, dealers, and brokers trade directly with each other without going through a fixed exchange. The price determination mechanism in OTC trading mainly relies on negotiation and agreement between the buyer and seller.

In Vietnam, OTC trading is also called by various other names such as network market, free stock market, or electronic quotation market. OTC transactions occur flexibly at bank counters, securities companies, or online via phone, email, and are not restricted by fixed location or time.

Differences Between OTC Markets and Centralized Exchanges

To better understand OTC trading, compare it with centralized stock exchanges like HOSE, HNX:

Advantages of the OTC Market

Expanding Investment Opportunities

OTC trading offers investors a more diverse set of investment assets compared to centralized exchanges. Instead of only trading listed stocks or futures contracts, the OTC market allows access to derivatives, CFDs, options, and many other financial instruments.

Derivative Products Complement the Spot Market

Derivative products on OTC markets have become an integral part of the financial ecosystem. For example, Bitcoin derivative trading volume accounts for over 30% of Bitcoin’s market value. In June 2021, derivative trading volume even surpassed Bitcoin spot trading, demonstrating the rapid growth of these products.

Increasing Safety Levels

Modern OTC markets have been optimized, automated, and apply multiple layers of security similar to centralized exchanges. Many reputable OTC brokers are licensed by international financial regulatory organizations, ensuring safe trading for investors.

Leverage Amplifies Power

On centralized exchanges, Vietnamese investors are usually granted a maximum leverage of 2x. Meanwhile, OTC markets allow for significantly higher leverage (up to hundreds of times), helping to magnify potential profits — but also bringing corresponding risks.

The OTC Market Situation in Vietnam

According to Vietnam General Statistics Office data, by the end of 2020, the number of operating enterprises in Vietnam was 683,600. However, only 1,575 companies had listed shares on the three main exchanges (HOSE, HNX, Upcom), accounting for just 0.2%.

This figure indicates a large gap in the market. The OTC market acts as an open door for companies to raise capital without meeting the strict requirements of centralized exchanges. Many large Vietnamese companies still operate OTC trading, offering attractive profit margins for investors.

In recent years, the domestic OTC market has become increasingly professional. OTC trading activities are not only limited to counters but also expanded on websites and mobile applications, organized systematically similar to centralized exchanges.

Important Notes When Trading OTC

Avoid Products with Low Trading Volume

When trading OTC, pay attention to the trading volume of the product. Securities with very low trading volume pose liquidity risks — meaning it will be difficult to find counterparty orders when buying or selling. This can lead to capital lock-up and difficulties in recovering your investment.

Diversify Your Investment Portfolio

Do not concentrate all your capital in a single asset or product. Allocating investments across various assets helps reduce systemic risk. This is a fundamental risk management principle applicable to any financial market.

Use Leverage Cautiously

Although OTC markets offer high profit potential, they also carry risks from strong price volatility. Leverage is a “double-edged sword” — it can help increase profits quickly but also easily cause “account blowout.” Use leverage only when you understand the product well and have good market analysis skills.

Research Thoroughly Before Investing

Any financial market involves risks. Before starting OTC trading, take time to learn about the products, trading mechanisms, and potential risks to make informed investment decisions.