Why are there OTC securities and whether they're limited to institutional investors?
What are some things that may lead a person to consider dealing in OTC securities? They are not publicly traded on exchanges, there is no regulation around them, they are risky because it is harder to obtain company information and press releases about these (i,e they are not mentioned in the news so often). Probably you need to pay the broker a large commission to arrange a trade with a counter party.
Yet they exist, but what can be an incentive for a person to deal in them? Are they only for institutions and hedge funds?
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No, not only.
OTC stocks are stocks not traded on regulated exchanges, but these are still stocks that represent shares of ownership in various companies. There may be numerous reasons why the company would not be trading on a regulated exchange.
There are many privately held companies which aren't officially listed on a regulated exchange, but which stocks are popular and sought after. For example, Facebook was trading on OTC for quite a while before their IPO because they were not listed publicly yet some people had shares that they could trade (some early employees/investors with fully vested stocks were selling them OTC).
Another example would be many companies delisted from an exchange for one reason or another (many times companies late with their SEC filings get delisted from a regulated exchange, yet there are retail investors owning stocks trying to get rid of, or buy some while they're cheap). If you believe the company now in trouble will get better - you'd want to invest in it even if it is not listed on a regulated exchange.
The two main benefits of OTC securities is non-standardization and bulk for derivatives. OTC stocks are less regulated but are regulated. All securities at root are regulated because they are essentially contracts. OTC derivatives are regulated to varying degrees. Regulation of OTC securities continually increases and tend to experience increased regulation after a crash: unregulated banking in the 80s, stocks in the 90s, mortgages & credit derivatives in the 10s.
OTCBBs and Pink Sheets are both more expensive on a pro rata basis.
Costs of OTC derivatives include the cost to draft a contract, escrow, brokering, clearing & settling, etc.
OTC derivatives can provide for more customization of the contracts which can be tailored to clients' needs. This is expensive, so contract size tends to be large. In that same regard, bulk derivative transactions which can be difficult in the public markets because of the small liquidity at the best orders.
OTC regulation has grown quite extensive.
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