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Third markets are financial markets in which listed securities are traded over the counter by investors who are not listed with a stock exchange. Also known as an over-the-counter (OTC) market, a third market traditionally has been utilized as a means of trading large blocks of stocks between institutions. This has changed, however, as more individual investors have begun to explore third-market transactions by investing and trading stocks online.
In the past, a third market was an ideal arena for the buying and selling of investments as a means of funding corporate pension funds or to secure large blocks of stocks for use by investment companies or securities firms. This securities trading took place outside of such markets as the American Stock Exchange or the New York Stock Exchange, so the movement would be more or less transparent to smaller investors. At the same time, the transactions conducted through a third-market approach could be accomplished quickly and easily, allowing the buyer and the seller to maximize the profit gained from the transactions.
Although it was once the province of institutional investors, the third market has experienced an increase in the active presence of individual investors. This phenomenon can be attributed to the advent of the Internet. Beginning in the 1990s and continuing into the 21st century, online trading has opened up a whole new world for investors who are not trading on behalf of a larger institution. These investors find that the use of third-market trading is quick, offers excellent variety and allows more anonymity than trading on an exchange.
Another advantage to third-market trading has to do with the costs of working through a broker. Transactions in a third market can be made directly by the investor, so there are no brokerage fees to be paid. Although many online trading sites do charge a transaction fee, it normally is much less than a standard broker's fee. The end result is that the investor will pay less for executing an order, which can be a very appealing benefit for many investors.
At the same time, the third market is not a good place for novices. Persons who are new to investing would do well to focus on trading through a brokerage. After the new investor has become more proficient in making projections and evaluating investments, a third market becomes a more viable option for investing.
I have known people with a great deal of investment experience who lost money through third market investing. Not having a brokerage does take away that extra form of adviser and manager that add security in investing. While it can be profitable, it is riskier.