How are financial trades made in an over-the-counter market? Discuss the role of a dealer in the OTC market.
In difference to the organized exchanges, which have physical locations, the over - the - counter market has no fixed location, or more correctly, it is everywhere. The over- the- counter market, or OTC, is a network of dealers around the world who maintain inventories of securities for sale. If you desire to buy a security that is traded OTC, you would contact your broker, who would then shop between competing dealers who have the security in their inventory. After locating the dealer with the greatest price, your broker would purchase the security on your behalf.
The role of dealers: Dealers make their living reselling them to others and buying securities. They work just like car dealers who buy cars from manufacturers for resale to others. Dealers compose money by buying securities for one price called as the bid price and selling them for a higher price called as the ask price. The spread or difference between the ask price and the bid price represents the dealer's fee.