Research Paper on Money and Banking

 What is OTC?
Over the Counter (OTC) is a market for securities that are not listed on an exchange. Security orders are finalized by way of telephone and a computer network that connects dealers. As conversely to the NYSE, which is an auction market, the OTC is a negotiated market. OTC dealers may either act as principals or agents for customers. The NASD regulates the OTC market. OTC stock prices are listed daily in newspapers, beside the National Market System stocks listed individually from the rest of the OTC market. The OTC market is a principal market for bonds.

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The OTC market is self-regulated by members pertaining to the National Association of Securities Dealers (NASD). The market comprises of hundreds of brokers and dealers tied jointly by the National Association of Securities Dealers Automated Quotation (NASDAQ) system. NASDAQ acts as a main clearinghouse for trades. It lists thousands of OTC stocks and some non-OTC issues that trade on so-called pink or yellow sheets. Companies not on the NASDAQ system may be intimately held, may be good quality firms, however they can also may be disaster-prone penny stock companies.

Investors should be conscious of price differences between stocks on registered exchanges and stocks on the OTC. OTC stocks have two prices, the bid, that is the purchase price and the ask, that is the selling price. The bid price is often as much as 10 to 15 percent higher than the ask price. This "bid/ask spread" is a commission that goes to the broker/dealer. You buy at the asked price, which is higher price and sell at the bid, which is the lower price. The difference goes to the broker-dealer, the market maker for the stock.

For instance NOT-SO-BIG company may have a bid of 5 and ask of 4 5/8. If you bought 4000 shares, the commission would be 3/8 times 4,000, or $1500. You will not see the $1500 commission charge on your order but the broker or market maker is making the money on the transaction. If you were to at once sell your 4,000 shares, the broker would pay you 4,000 x 4 5/8, or $18,500. The $1500 has gone straight into your broker's pocket. However, they'll claim they didn't charge you a commission. Small stocks on the OTC markets generally move up or down in prices faster than larger companies. Nonetheless, by reason of broad spreads, a trading strategy to take advantages of the price moves may generate more commissions for the broker than profits for you. Penny stock firms generally toll excessive commissions. For instance, the SEC reported a brokerage that sold a customer $25,000 in stock and made a $12,500 commission.

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Market risk
Market risk pertains to the risk of publicly traded securities, where informed and uninformed decisions take place, thereby increasing the uncertainty. Where the uncertainty or the risk pertaining to the capital markets are concerned, one of the strategy to reduce such risk is spreading the risk or diversifying. This strategy spreads the overall risk, so in turn, the investor does not end up in doldrums. Another strategy to reduce the market risk is by managing it through buying of national securities in capital markets, where the price fluctuation is lowest as these securities are backed and secured by the government. Another factor that contributes for the relationship for the demand for money and the changes in the interest rates is the asset demand for the money. In general, a well-constructed portfolio may want to contain low risk investments as well as riskier ventures. But it is not in general advisable to hold M1 (currency or checking deposits). The reason is that the other assets, such as the government securities or safe money market mutual funds are just as safe asM1 and have higher interest rates. Thus the transaction money is dominated asset as other assets are equally safe but have higher yields. Thus the overall risk of capital markets can either be diversified or reduced by the strategies outlined above.

 

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