Trade Securities Outside Of The Formal Exchange Systems

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Over-the-counter, or OTC, markets are used to trade securities outside of the formal exchange systems that sell different types of derivatives and unlisted stocks. Smaller companies often have their stocks traded on OTC markets because they are not able to meet the extensive requirements of the formal exchanges. These markets are not subject to the same strict regulations as formal stock exchanges and the companies that use them are not required to be as transparent as larger companies trading on the formal exchanges (“Over-the-counter,” 2016). One of the most important economic functions of over-the-counter markets is that it provides a way for “participants to hedge exposures” and “manage risks” (“Over-the-counter derivatives,” 2013). This fills an important need for businesses that the money markets and stock markets are not able to meet. While they provide a place to unite investors seeking to earn returns and borrowers seeking financing, those markets do not trade instruments that allow businesses to hedge against specific risks and exposures. OTC markets are critical components of the economy that fulfil this need. Taken as a whole, the money markets, stock markets, and OTC markets facilitate efficiency within the financial markets that ensures funds from savers are directed to their best sources. Not only does this help the US economy grow, but it also “facilitates the international flow of funds between countries” (“Please explain how financial markets,” 2005).
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