Stock market, bond market - American businessA stock is a financial instrument with an infinite life because it has no maturity date. As long as the issuing corporation exists, a stock will have value. The existence of stock markets provides liquidity for these infinitely longterm securities. Additionally, because stock markets are instrumental in establishing market values for stocks, they are integral in determining market values for corporations.
A bond is also a long-term debt instrument, but unlike stocks, bonds have finite lives as determined by their maturity dates. Common bond maturities are from 5 to 30 years. The existence of bond markets provides liquidity for bondholders who decide not to hold bonds until their maturities.
The demand for stocks and bonds and the ability of corporations to sell them would be greatly diminished were it not for the existence of the stock and bond markets. These are exchanges where buyers and sellers of securities are brought together. In advanced nations, stock and bond markets are highly organized, creating great efficiencies in the spread of information and minimizing exchange transactions costs. In fact, the existence of highly organized securities markets fosters continued economic growth by efficiently channeling funds to their best uses. (Lackluster economic growth in lesser-developed countries is often attributed to their lack of wellorganized financial markets.)
The U.S. stock market is comprised of organized exchanges and the over-the-counter (OTC) market. The organized exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). Corporations whose stocks are traded on one of these exchanges are said to be “listed.” It is prestigious for a corporation to meet the stringent requirements for listing. Unlisted stocks are those traded in the OTC market. While NYSE dominates the stock exchanges in dollar volume traded, the OTC market is the largest stock exchange in terms of the number of different corporations whose stocks are traded there. The backbone of the OTC market is NASDAQ, the National Association of Securities Dealers Automated Quotation. Geographically dispersed securities dealers connected by computers are the intermediaries for the OTC stock traders. The enormous size of the OTC market is illustrated by the fact that NASDAQ surpasses NYSE in annual share volume.
Stock and bond exchanges are also classified as being primary markets or secondary markets. In primary markets, new issues of stocks and bonds are sold to the public. initial public offerings are primary-market transactions, and investment banking firms are the financial intermediaries. The secondary markets are the exchanges where outstanding stocks and bonds are traded.
Bond markets provide liquidity for bondholders. There is an inverse relationship between bond prices and interest rates in the economy; prices for outstanding bond are as volatile as interest rates. When interest rates rise above the coupon rate on a bond, this will force the bond to sell at a discount, below par (face) value. When interest rates fall below a bond’s coupon rate, this will cause the bond to sell at a premium, above par value. Stable interest rates lead to stable prices for outstanding bonds.
See also random-walk theory; stock-rating systems.