Questrade - Empowering you to take control of your financial future. Join the journey!

---

What is a Stock Exchange, and how does it differ from over-the-counter (OTC) markets?

---

A Stock Exchange and over-the-counter (OTC) markets are both platforms where securities are traded, but they operate differently in terms of structure, regulation, and the type of securities they handle. Here's a breakdown of each and how they differ:

1. Stock Exchange
​
A stock exchange is a centralized marketplace where stocks, bonds, and other securities are bought and sold. Examples include the New York Stock Exchange (NYSE) and Nasdaq.

Characteristics:

• Centralized: Trades occur in a regulated, organized, and centralized location, whether physical or electronic.
• Listed Securities: Only companies that meet specific financial and regulatory requirements are listed on an exchange. These companies must follow stringent reporting and transparency standards.
• Regulation: Highly regulated by government bodies (e.g., the Securities and Exchange Commission or SEC in the U.S.) to ensure transparency and fairness in trading.
• Market Maker: Exchanges use a system of market makers and specialists who ensure liquidity by buying and selling stocks.
• Public Pricing: Prices are visible to the public, and investors can see real-time quotes, making it a transparent system.
• Trading Hours: Exchanges have specific operating hours during which trading occurs, usually on business days.

Advantages:

• Liquidity: High volume of trades ensures more liquidity, meaning it’s easier to buy and sell stocks.
• Transparency: Trades are highly regulated, with strict disclosure rules for companies, making it a safer environment for investors.
• Market Access: Large companies and institutional investors primarily trade on exchanges due to regulatory requirements and visibility.

2. Over-the-Counter (OTC) Markets
​
The OTC market is a decentralized network where trading takes place directly between parties (typically through a broker-dealer) rather than through a formal stock exchange. Examples include the OTCQX and OTC Pink markets in the U.S.

Characteristics:

• Decentralized: There is no centralized exchange. Trades are made through a network of brokers and dealers who negotiate directly with each other.
• Unlisted Securities: Companies traded OTC are usually smaller, newer, or unable to meet the listing requirements of major exchanges. This includes penny stocks, foreign companies, and companies in financial distress.
• Less Regulation: OTC markets are less regulated compared to exchanges, and companies have fewer financial reporting requirements.
• Price Negotiation: Since there is no central order book, prices are often negotiated between buyer and seller, and they may not always be transparent.
• Broker-Dealer System: Trades are facilitated by broker-dealers who act as intermediaries and market makers.
• Lower Liquidity: Stocks traded in OTC markets often have lower liquidity, meaning it may take longer to buy or sell these securities, and price spreads may be wider.

Advantages:

• Access to Small Companies: Investors can access smaller, emerging companies or foreign companies not listed on major exchanges.
• Potential for Growth: There is potential for higher returns with small or distressed companies that later succeed.

Summary

• Stock exchanges are centralized, highly regulated markets where large, well-established companies trade with high liquidity and transparency. They offer a more secure trading environment.
• OTC markets are decentralized, less regulated, and deal with smaller, riskier securities that may have less liquidity. These markets offer access to companies not listed on major exchanges but come with higher risks.

Each type of market serves different kinds of investors and companies, with stock exchanges being more formal and regulated, and OTC markets offering opportunities in niche or emerging companies.

---