A:

Like stocks, after issuance in the primary market, bonds are traded between investors in the secondary market. However, unlike stocks, most bonds are not traded in the secondary market via exchanges. Rather, bonds are traded over the counter (OTC). There are several reasons why most bonds are traded OTC. Chief among those reasons is their diversity.

Stocks have only two types, common stock or preferred stock, and are limited to few characteristics. Bonds on the other hand, have different qualities, maturities and yields. The outcome of this diversity is more issuers, and issues of bonds with different characteristics, which makes it difficult for bonds to be traded on exchanges. Another reason why bonds are traded over the counter is the difficulty in listing current prices.

Stock prices are affected by news events, the P/E ratio of a company and, ultimately, the demand and supply of shares, which are reflected in the daily stock price. On the other hand, bond prices are affected by changing interest rates and credit ratings. Since trade time between issues can last weeks or even months, it is difficult to list current prices for a particular bond issue, which makes it difficult to trade bonds on the stock market.

(For information regarding bond pricing mechanisms, refer to Get Acquainted With Bond Price/Yield Duo.)

This question was answered by Chizoba Morah

RELATED FAQS
  1. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  2. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
  3. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  4. What is the difference between the bond market and the stock market?

    The bond market is where investors go to trade (buy and sell) debt securities, prominently bonds. The stock market is a place ... Read Answer >>
Related Articles
  1. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  2. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  3. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  4. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  5. Investing

    U.S. Corporate Bonds: The Last Safe Place to Make Money

    There aren't many other sources right now for relatively safe, steady income.
  6. Investing

    Surprise! The Best Long-term Bond Investment May Be Savings Bonds

    A 20-year Series EE savings bond pays more interest than a 20-year Treasury bond. So are government-issued long-term bonds the best bet going?
  7. Investing

    Explaining Interest Rate Risk

    Interest rate risk is the risk that investments already held will lose market value if new investments with higher interest rates enter the market.
  8. Investing

    What Is The Difference Between The Bond Market And The Stock Market?

    The differences between the two markets involve how each product is traded and the risks they present.
  9. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Bond Yield

    The amount of return an investor will realize on a bond. Several ...
  3. Bond Option

    An option contract in which the underlying asset is a bond. Other ...
  4. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  5. Term Bond

    Bonds from the same issue that share the same maturity dates. ...
  6. Bond Ladder

    A portfolio of fixed-income securities in which each security ...
Hot Definitions
  1. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  2. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  3. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  4. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  5. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  6. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
Trading Center