What Is the OTC Market? A Comprehensive Guide for Investors

When it comes to stock trading in Vietnam, most people usually think of major exchanges like HOSE, HNX, or Upcom. However, alongside these exchanges, the OTC market still exists and develops strongly with unique investment opportunities. So, what is the OTC market? How does it differ from traditional exchanges? And is it suitable for your investment strategy?

Basic Concepts of the OTC Market

The term OTC stands for “Over-the-counter,” which in Vietnamese means “Giao dịch tại quầy.” It is not a centralized trading floor with a fixed location but a decentralized network where investors, brokers, and financial institutions directly negotiate and agree with each other.

Unlike fixed-price mechanisms on centralized exchanges, the OTC market operates based on bilateral negotiation principles. Buyers and sellers agree on a price acceptable to both parties. Transactions can occur at bank counters, securities companies, or entirely online via phone, email, or web platforms.

In Vietnam, the OTC market is also called by various other names: network market, free stock market, or electronic quotation market. Initially, it only served as a secondary market, but today it has become an important part of the financial system, coordinated by professional brokers.

Differentiating the OTC Market from Centralized Exchanges

To better understand the position of the OTC market, we need to compare the main differences:

Price Formation: On centralized exchanges like HOSE or HNX, the prices are set by the exchange through an auction mechanism. In contrast, in OTC, brokers and agents are the ones who set and manage prices.

Trading Hours: Centralized exchanges are only open during specified hours. HOSE operates from 9:00 to 14:45 Monday to Friday, HNX from 9:00 to 15:00 on the same days. However, the OTC market allows 24/7 trading at any time, providing greater flexibility for investors.

Product Types: Centralized exchanges mainly offer listed stocks and index futures contracts. The OTC market, on the other hand, offers a diverse range of products including unlisted stocks, derivatives, CFDs, options, and customized contracts according to each investor’s needs.

Payment Methods: OTC provides more flexible payment methods, even allowing same-day T+0 settlement. Centralized exchanges follow the T+2 settlement rule, meaning settlement occurs two days after the transaction.

Contracts: On centralized exchanges, all contracts are standardized and unchangeable. OTC allows full customization according to the specific requirements of the trading parties.

Key Advantages of the OTC Market

Expanding Investment Opportunities

The OTC market offers investors a vast collection of assets. While Vietnam’s centralized exchanges mainly limit themselves to stocks and VN30 futures contracts, OTC opens the door to products like derivatives, CFDs, options, and more. This enables investors to diversify their portfolios easily and seek profit opportunities aligned with their preferences.

Derivative Products Supporting the Spot Market

Taking Bitcoin as a clear example: since the launch of Bitcoin derivatives in 2017, their trading volume has skyrocketed. Data shows that the trading volume of Bitcoin derivatives now accounts for over 30% of the total Bitcoin market value. In June 2021, derivative trading volume even surpassed Bitcoin spot trading volume. This figure demonstrates the increasing popularity of derivative tools.

Enhanced Security and Safety

The OTC market today has been optimized, automated, and protected by multiple layers of security comparable to centralized exchanges. Many professional OTC brokers are authorized and supervised by reputable financial regulatory organizations, allowing investors to trade with confidence.

Leverage to Amplify Profits

On centralized exchanges, investors are usually granted a maximum leverage of 2x, and many stocks do not allow leverage at all. However, OTC offers much higher leverage levels, helping investors significantly amplify their potential profits. With high leverage, a small capital can generate profits equivalent to a large amount on traditional exchanges.

The OTC Market Situation in Vietnam

According to data from the General Statistics Office of Vietnam, by the end of 2020, the country had about 683,600 active enterprises. However, only around 1,575 companies had stocks traded on the three major exchanges (HOSE, HNX, Upcom), accounting for just 0.2% of the total. This low figure creates a large gap that the OTC market can fill.

With the strict listing requirements of official exchanges, the OTC market becomes an optimal gateway for companies to raise capital more easily without meeting harsh conditions. Some large enterprises still choose to trade on OTC to maintain flexibility.

Although operations have stabilized compared to previous years, OTC stocks remain an attractive investment channel with high return rates. The domestic OTC market is increasingly popular as it expands activities on online websites and mobile apps, organized professionally similar to official exchanges.

Currently, reputable OTC platforms and brokers in Vietnam such as SanOTC, VN-Direct, Vietstock are the main options. The advantage of these platforms is providing diverse OTC stock information and stable operation. However, their limitation is mainly focusing on domestic OTC stocks, lacking international financial products.

Risks to Note When Investing in OTC

Avoid Trading Low-Volume Products

Low trading volume is a warning sign of liquidity risk. When trading volume is sparse, investors will face difficulties finding counterparties for buy/sell orders. This situation can lead to “capital lock-up,” making it impossible to withdraw funds when needed.

Diversify to Manage Risks

A common mistake among investors is putting all capital into a single product. A smarter strategy is to allocate investments across various assets. This approach helps reduce systemic risk impact and protects the portfolio from significant losses.

Use Leverage Cautiously

While leverage can quickly multiply profits, it is also a “double-edged sword”—it can equally magnify losses. Excessive leverage without proper understanding of the product or market can lead to account liquidation. Therefore, investors should prepare thoroughly and have solid knowledge before using leverage.

What is the OTC market? It is a market full of potential but also full of challenges. With comprehensive understanding, appropriate strategies, and disciplined trading, investors can leverage the benefits that the OTC market offers.