Both capital and money markets take advantage of primary and secondary markets. Consider the implications for investment liquidity.

Capital Markets

Bloomberg provides extensive information on the activity of capital markets across the globe.


Look at the performance of the major indexes from around the world. How are those from the United States performing? What about the major indexes in Asia and Europe?

Experiment with different indexes from the United States and other countries, looking at their perfor- mance charts over various time periods. Understanding how to navigate and interpret these charts may one day be invaluable to your professional and personal finances.

The over-the-counter (OTC) market lists the stocks of far more companies than the NYSE. When companies first make an offering of stock to the public, they most often do so by trading over the counter. Most trading in corporate bonds occurs in the over-the-counter market. The term over-the-counter comes from the period in the development of financial markets when banks were the primary dealers in stocks and bonds. Investors completed transactions at banks’ counters, thereby trading over the counter.

Trading in the largest and most active OTC stocks occurs through the National Association of Securities Dealers Automated Quote System (NASDAQ), a nationwide computerized network of dealers. Computer terminals linked to the NASDAQ system give brokerage firms access to all of the current quotations for all stocks on the system (no bonds are traded through the NASDAQ system). Price quotations include the ask price (what the dealer will sell the security for; the price they are asking) and the bid price (what they will pay for the security). The ask price always exceeds the bid price, albeit sometimes by only a few cents. Buying a NASDAQ system stock requires the broker (or a trader at a broker- age company’s headquarters) to find the lowest ask price and contact the dealer offering that price to confirm the transaction.

Whenever you buy or sell securities, whether you trade on the NYSE or NASDAQ sys- tem, you pay transaction costs. These costs include the commission paid to your broker and the bid-ask spread, the difference between the bid price and the ask price. If you buy a share of stock, you pay an ask price, and when you sell you receive a bid price. For heavily traded stocks the bid-ask spread is small (less than 1% of the share price), but for infrequently or thinly-traded stocks the spread can be significant (in the range of 3% to 6% of the share price). For example, the difference between bid and ask prices is small for stocks like Microsoft or Intel that trade on high volume, allowing dealers to make a small profit on each transaction while executing many trades. In contrast, very low-priced, infrequently traded penny stocks often have bid-ask spreads in excess of 25%, meaning an investor must see the price of the stock increase by 25% just to break even on the investment.

As one might expect, technology is playing an increasing role in security trading. As exchanges embrace faster and cost-effective electronic trading networks, bid-ask spreads are decreasing, and the role of specialists is diminishing. Since 2007, the NYSE has offered the electronic trading platform known as the Hybrid Market for its listed stocks, with a great majority of its trades now being executed electronically.

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