Secondary markets can be organized in two ways. One is to organize exchanges, where buyers and sellers of securities (or their agents or brokers) meet in one central location to conduct trades. The New York and American stock exchanges for stocks and the Chicago Board of Trade for commodities (wheat, corn, silver, and other raw materials) are examples of organized exchanges. The other method of organizing a secondary market is to have an over-thecounter (OTC) market, in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities “over the counter” to anyone who comes to them and is willing to accept their prices. Because over-the-counter dealers are in computer contact and know the prices set by one another, the OTC market is very competitive and not very different from a market with an organized exchange. Many common stocks are traded over-the-counter, although a majority of the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange. The U.S. government bond market, with a larger trading volume than the New York Stock Exchange, is set up as an over-the-counter market. Forty or so dealers establish a “market” in these securities by standing ready to buy and sell U.S. government bonds. Other over-the-counter markets include those that trade other types of financial instruments such as negotiable certificates of deposit, federal funds, banker’s acceptances, and foreign exchange.
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