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. How are junk bonds regulated?

    Learn how junk bonds are regulated by the SEC and FINRA, and understand the anti-fraud provisions that apply to securities ...
  2. How do you find accrued interest on a bond?

    Learn how to determine the accrued interest on a bond. The price in the secondary market reflects the accrued interest the ...
  3. 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 ...
  4. How important is credit rating on a fixed income security?

    Learn how credit ratings for fixed-income securities impact the yield and provide guidance for the amount of risk for the ...
RELATED TERMS
  1. Accelerated Return Note (ARN)

    A short- to medium-term debt instrument that offers a potentially ...
  2. Next Generation Fixed Income (NGFI) Manager

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...
  3. Next Generation Fixed Income (NGFI)

    Next generation fixed income is an innovative approach to investing ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  5. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...
  6. Bulldog Market

    A nickname for the foreign bond market of the United Kingdom. ...

You May Also Like

Related Articles
  1. Bonds & Fixed Income

    How are junk bonds regulated?

  2. Bonds & Fixed Income

    How do you find accrued interest on ...

  3. Bonds & Fixed Income

    Which factors most influence fixed income ...

  4. Bonds & Fixed Income

    How important is credit rating on a ...

  5. Professionals

    Worried About Stocks? Try on Convertibles

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!