Legal Definitions - over-the-counter

The term over-the-counter, often abbreviated as OTC, refers to two distinct concepts, primarily in the fields of finance and pharmaceuticals.

• In the context of securities and finance:

  This refers to financial instruments, such as stocks or bonds, that are traded directly between two parties or through a network of dealers, rather than on a formal, centralized exchange like the New York Stock Exchange (NYSE) or NASDAQ. Transactions are negotiated directly between brokers and dealers, often electronically, without the public auction-style trading found on major exchanges.

  • Example 1: Trading Municipal Bonds

    A city government issues municipal bonds to fund a new infrastructure project. These bonds are typically not listed on a major stock exchange. Instead, large institutional investors or individual buyers purchase them directly from bond dealers who facilitate the transaction. If an investor later wishes to sell these bonds, they would again work with a bond dealer who finds a buyer through their network, rather than placing an order on a public exchange.

    Explanation: This illustrates how municipal bonds are traded directly between parties via dealers, bypassing the centralized trading mechanisms of a stock exchange.

  • Example 2: Foreign Exchange Market

    When a multinational corporation needs to convert a large sum of euros into U.S. dollars to pay suppliers, they contact a bank or a specialized foreign exchange broker. The transaction is executed directly between the corporation and the bank (or through the broker's network of banks), at a negotiated rate, rather than through a public exchange where currencies are listed like stocks.

    Explanation: The global foreign exchange market is largely decentralized, with transactions occurring directly between financial institutions and their clients, demonstrating the over-the-counter nature of currency trading.

  • Example 3: Shares of a Small, Unlisted Company

    A startup technology company, not yet large enough or ready to meet the stringent requirements for listing on a major stock exchange, decides to allow some early investors to buy and sell its shares. These transactions occur directly between the buyers and sellers, often facilitated by a specialized broker who helps negotiate the price and terms, without the shares ever appearing on a public trading platform.

    Explanation: This scenario highlights how shares of companies that do not meet exchange listing criteria can still be traded directly between interested parties, fitting the definition of an over-the-counter security.

• In the context of pharmaceuticals and healthcare:

  This refers to medications or health products that can be purchased legally by consumers directly from a store (such as a pharmacy, supermarket, or convenience store) without requiring a doctor's prescription. These products are generally considered safe and effective for self-treatment of minor ailments when used as directed.

  • Example 1: Purchasing Cold and Flu Remedies

    During cold season, an individual experiencing sniffles and a sore throat visits a drugstore and buys a multi-symptom cold and flu medication, such as a decongestant and cough suppressant combination, directly from the shelf.

    Explanation: This medication is available for purchase by anyone without needing a doctor's written authorization, making it an over-the-counter drug.

  • Example 2: Buying Antacids for Indigestion

    Someone experiencing heartburn after a meal can go to a grocery store and purchase a bottle of antacid tablets or liquid to relieve their symptoms.

    Explanation: Antacids are readily accessible for direct consumer purchase without a prescription, fitting the definition of an over-the-counter product.

  • Example 3: Acquiring Topical Antiseptic Wipes

    To clean a minor cut or scrape, a person can buy antiseptic wipes or a small bottle of rubbing alcohol from a pharmacy or supermarket.

    Explanation: These products are available for immediate purchase by consumers for self-care, without requiring a medical professional's prescription.