Why are most bonds traded on the secondary market "over the counter"?

By Chizoba Morah AAA
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

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