Over the Counter (OTC) refers to the trading of financial instruments such as stocks, bonds, derivatives, and currencies directly between two parties, rather than through a centralized exchange like the NSE or BSE. OTC markets operate through dealer networks, where transactions are privately negotiated without the oversight of an exchange. This type of trading offers flexibility in terms of pricing, contract size, and terms, but also comes with higher risks due to limited transparency.

In the OTC market, trades are typically facilitated by dealers or market makers who quote both buy and sell prices for securities. These markets are often used for securities that do not meet the listing requirements of formal exchanges, including small-cap stocks, corporate bonds, or customized derivatives. Because OTC transactions are conducted directly between parties, they can be tailored to specific investment needs, such as unique maturity dates or payout structures.

However, the lack of centralized regulation means that OTC trading involves higher counterparty riskóthere is a possibility that one party may default on the agreement. Pricing transparency is also lower compared to exchange-traded instruments, making it difficult for investors to assess fair market value. To address such concerns, regulatory authorities like SEBI in India have implemented measures to monitor and regulate certain OTC transactions, particularly in the derivatives and debt markets, to enhance transparency and investor protection.

For investors, understanding the nature of OTC markets is crucial. While they provide access to a broader range of securities and greater flexibility, the trade-off is reduced liquidity, higher credit risk, and limited public information. Hence, OTC investments are generally suited for institutional investors or experienced traders with a clear understanding of risk management and pricing mechanisms.