What is the difference between OTC (over the counter) and ETF (exchange trade fund)?

OTC : These are very customized products and some are very complex derivatives instruments. ISDA guidelines need to be followed when 2 parties come into a contract with OTC produc. There is no regulatory body involved. ETF : As the name suggest these are traded on various exchanges and as per the region and country they are regulated by the regulatory bodies. Regulatory bodies are there to protect individuals by various frauds that can happen in this market.

OTC (Over the Counter):- Its a forward contract, its treading between 2 Private parties, it is an obligation to buy and sell the underline asset for a specif price for a future dated delivery.

 

ETF (Exchange Tread Fund):- It is a fund of mutual fund unit or share, the share which is traded in stock market is know as ETF

OTC (Over-The-Counter)- Products which are sold in OTC market are custom tailored. For example, strike price, maturity, terms of delivery etc. of an option contract sold over-the-counter are negotiated between the buyer and the seller to serve their specific needs. This is a less regulated market and hence offers lesser liquidity and more credit risk compared to exchange traded products.

 

ETF (Exchange Traded Fund)- ETFs, like mutual funds, are pooled investment vehicles. However there are certain difference between and MF and an ETF. ETFs are exchange traded and can be traded many times in a single day like stocks and also offers trading strategies like short selling that MFs don't offer.

OTC is secondary market. The shares which are not traded in capital market like NYSE are traded in secondary Market normally the dealers. We may also say that shares of small companies which does not fulfill the requirement of NYSE to be registered and traded there are traded in OTC.

 

ETF is derived from foreign capital market to be invested by local investors. For example an American Investor needs to invest in the japnese stocks like sony Toshiba and some automobile like Honda Toyota and Nissan. But being an American he cant understand the financial statements in japense language. So ETF is created which makes a basket of these stocks of sony Toshiba Toyota Honda Nissan and offer them for sale in US market and price termed in dollars instead of yen in Japan. Hence an American investor is able to invest in Japanese stocks without going to Japnese stock exchange.

 

OTC: They are typically a derivative instrument that aren't regulated by Capital Market Authorities. They are largely a contract purely between a buyer and a writer of the contract. Such contracts aren't created for mass public participation. ETF: They have nothing to do with OTC contracts. They can be compared with MFs to a certain extent. ETFs generally mirror a benchmark and are created for retail participation. So a Benchmark Index which is ordinarily available only through derivatives miss out on retail participation due to the involvement of leverage on Futures contracts. ETFs remove the risk of leverage and make them akin to Equity trading where one can buy a single share of a benchmark index on full value payments.