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Glossary: Over-the-Counter (OTC)

Over-the-Counter (OTC)

Definition

Over-the-Counter (OTC) is a term used in two primary contexts: medicine and financial markets, referring to products or securities traded outside traditional centralized exchanges.

Medical Context

In pharmaceuticals, OTC refers to medications that can be purchased without a prescription. These medications are considered safe for direct consumer purchase when used according to package instructions[1].

Common OTC Medicines

  • Aspirin
  • Acetaminophen
  • Decongestants
  • Antacids
  • Laxatives
  • Antihistamines

Important Considerations:

  • Patients should consult doctors before taking OTC medicines, especially if they have existing health conditions
  • Some OTC medications may interact with prescription drugs
  • Always follow package instructions carefully

Financial Markets Context

In finance, OTC describes a decentralized market where financial instruments are traded directly between two parties without supervision of a formal exchange[2][3].

Key Characteristics of OTC Markets

  • Trading occurs through broker-dealer networks
  • Not conducted on centralized exchanges like NYSE
  • Allows trading of various financial instruments:
  • Stocks
  • Bonds
  • Derivatives
  • Commodities
  • Currencies

Unique Features

  • More flexible trading specifications
  • Often involves smaller or less established companies
  • Trades can be customized to specific risk exposures
  • Provides additional market liquidity

Trading Mechanisms

  • Trades executed online or via telephone
  • Managed by networks like OTC Markets Group and FINRA
  • Prices are not always publicly disclosed
  • Involves bilateral contracts between parties

Risks and Considerations

  • Less regulated compared to formal exchanges
  • Potential for higher credit risk
  • May involve penny stocks trading under $5 per share
  • Requires careful due diligence by investors

Historical Context

OTC markets have existed since the 17th century, predating formal stock exchanges, and remain an essential component of global financial systems[4].

Citations:
[1] https://www.definitivehc.com/resources/glossary/over-the-counter
[2] https://www.investopedia.com/terms/o/otc.asp
[3] https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/over-the-counter-otc/
[4] https://www.investopedia.com/terms/o/over-the-countermarket.asp
[5] https://en.wikipedia.org/wiki/Over-the-counter_(finance)
[6] https://www.schwab.com/stocks/understand-stocks/otc-stock
[7] https://www.investor.gov/introduction-investing/investing-basics/glossary/over-counter-otc-securities
[8] https://www.finra.org/investors/insights/over-the-counter-equities-trading

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