Trading bonds are not the same as the stock market. They are not traded at the second market. Instead, bonds are traded over the counter (OTC). There are several reasons why most bonds are traded OTC, but chief among them is their diversity.

Stock Types and Influences

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 supply and demand of shares, which are reflected in the daily stock price. In contrast, 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 would make it challenging to trade bonds on the stock market

The majority of corporate bonds that are issued by private and public corporations are traded OTC rather than on exchanges. Furthermore, many of the transactions involving exchange-traded bonds are done through OTC markets.

Corporate bonds are issued by firms to raise capital to fund various expenditures. They are attractive to investors because they provide much higher yields than bonds issued by the government. However, this higher yield is accompanied by higher risk. Investment in corporate bonds comes primarily from pension funds, mutual funds, banks, insurance companies and individual investors.

The bonds that are traded on the OTC markets are most beneficial in the liquidity that they provide. This liquidity provides ample protection for investors looking to sell bonds before maturity. Along with this liquidity, corporate bonds traded OTC provide a steady stream of income and security because they are rated based on the credit history of the issuing firm.

However, these bonds are not perfect investments and they include major risk, such as credit risk and call risk. Credit risk can arise when an issuer is unable to maintain payments on the bond or if the credit rating of the issuer is lowered by a rating corporation. Call risk arises when an issuer redeems the issue before maturity, leaving the investor with less favorable investing possibilities.

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