Many investors prefer to do their buying and selling on the OTC (over the counter) marketplace and not on exchanges. Why? There are numerous reasons, but the most common one is probably that OTC transactions give users a chance to set specific parameters regarding amounts, contract expiration dates, and dozens of other characteristics of the deal. Fortunately, there are many kinds of financial derivatives to meet the demands of an ever-expanding retail investing marketplace.

In addition to CFDs (contracts for difference), investors turn to off exchange markets to trade assets like swaps, options, forwards, interest rates, credit risk, commodities, fixed income securities, equities of all types, and foreign exchange rates. What are the current favorites among active trading and investing enthusiasts? Consider the following details to see why so many are looking past the traditional exchanges to identify opportunities for growing their portfolios.

Get the Terminology Right

Anyone who wants to get involved in derivative-based trading should know the fundamental terminology. Otherwise, it's very easy to lose track of which asset classes are over the counter and which aren't. Likewise, individuals should remember the main differences between the two kinds of markets. Here's the short version of how the terminology works.

First, there are two primary financial marketplaces: one involves derivatives, and the other focuses solely on what is called capital assets, like corporate stocks and similar securities. Anyone can purchase a fractional ownership stake in an organization by acquiring its shares. After that, the holder's gains or losses are directly related to how well or poorly the business performs.

However, a derivative gives the holder a chance to earn a profit regardless of whether the company does well or not. That's because owners of derivatives can speculate on price increases or decreases, thus taking either side of the price movement. If you expect company ABC's stock price to go down, you could possibly post a financial gain if you had taken the downside of the price move. There are two types of derivatives: OTC and ET (exchange traded). The latter are offered via public platforms and exchanges, as their name implies. The OTC version of this category is detailed below.

CFDs Are the Most Popular

For those who ask what are cfds, the answer is simple. Not only are the instruments the most popular over the counter derivatives of all, but they allow to take either side of a potential price swing on stocks, commodities, cryptocurrency, and even forex pairs. One of the reasons they are such big hits with retail investors is the low cost of entry. Even if the underlying asset is a pricey corporate stock, the price of one CFD might be priced very low. That way, investors and traders can purchase as few or as many contracts as they need to satisfy their profit-making strategies.

Commodities, Equities, and Interest Rates

After CFDs, in the order of popularity, three other instruments get plenty of attention from investors who prefer to purchase off exchange assets. They are interest rates, stocks, and commodities, which are broad categories that encompass vast amounts of activity. If buyers and sellers meet in an unregulated market and use a third party to oversee the mechanics of the transaction, they can trade OTC derivatives on interest rates, stocks (equities), commodities, and other more exotic instruments and assets. The defining element is that the deal doesn't take place on an exchange, but another core aspect is that all business involves only two parties: buyer and seller.

Swaps, Forwards, and Swaptions

Forwards are very similar to traditional futures contracts, with the exception that they are off exchange and have negotiated expiration dates, quantities, and prices. While futures account for a huge percentage of the exchange trading universe, forwards are growing in popularity among those who enjoy over the counter investing and speculation on a wide range of underlying assets. Swaptions and swaps are two more choices people can make when they wish to put their money in the non-exchange investments. 

Usually based upon underlying interest rates, commodities, or exchange rates of specific currencies, swaps bring order amid chaos. The two parties in a swap make a deal to engage in a future trade at a set rate, no matter what the prevailing rate might happen to be at the time of the actual transaction. Swaps are becoming more common among individuals who exchange high-dollar assets in categories where interest rates have recently been volatile. Swaptions combine the characteristics of options and swaps because the holder of a swaption has the right, but not the obligation, to execute the designated swap at some agreed-upon future date.