trading

over-the-counter market

Trading in stocks and bonds that does not take place on stock exchanges. Such trading occurs most often in the U.S., where requirements for listing stocks on the exchanges are strict. Schedules of fees for buying and selling securities are not fixed in the over-the-counter market, and dealers derive their profits from the markup of their selling price over the price they paid. Many bond issues and preferred-stock issues, including U.S. government bonds, are listed on the New York Stock Exchange but have their chief market over-the-counter. Other U.S. government securities, as well as state and municipal bonds, are traded over-the-counter exclusively. Institutional investors such as mutual funds often trade over-the-counter because they are given volume discounts not offered on the exchanges. The regulation of the over-the-counter market is carried out largely by the National Association of Securities Dealers, created by Congress in 1939 to establish rules of conduct and protect members and investors from abuses. Seealso NASDAQ.

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Any of the purchases and sales of government securities and commercial paper by a central bank in an effort to regulate the money supply and credit conditions. Open market operations can also be used to stabilize the prices of government securities. When the central bank buys securities on the open market, it increases the reserves of commercial banks, making it possible for them to expand their loans and investments. It also increases the price of government securities, equivalent to reducing their interest rates, and decreases interest rates generally, thus encouraging investment. If the central bank sells securities, the effects are reversed. Open market operations are usually performed with short-term government securities such as treasury bills.

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Set of institutions, conventions, and practices whose aim is to facilitate the lending and borrowing of money on a short-term basis. The money market is, therefore, different from the capital market, which is concerned with medium- and long-term credit. The transactions that occur on the money market involve not only banknotes but assets that can be turned into cash at short notice, such as short-term government securities and bills of exchange. Though the details and mechanism of the money market vary greatly from country to country, in all cases its basic function is to enable those with surplus short-term funds to lend and those with the need for short-term credit to borrow. This function is accomplished through middlemen who provide their services for a profit. In most countries the government plays a major role in the money market, acting both as a lender and borrower and often using its position to influence the money supply and interest rates according to its monetary policy. The U.S. money market covers financial instruments ranging from bills of exchange and government securities to funds from clearinghouses and certificates of deposit. In addition, the Federal Reserve System provides considerable short-term credit directly to the banking system. The international money market facilitates the borrowing, lending, and exchange of currencies between countries.

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Study of the requirements of specific markets, the acceptability of products, and methods of developing and exploiting new markets. Various strategies are used for market research: past sales may be projected forward; surveys may be made of consumer attitudes and product preferences; and new or altered products may be introduced experimentally into designated test-market areas. Formal market research dates back to the 1920s in Germany and the 1930s in Sweden and France. After World War II, U.S. firms led in the use and refinement of market-research techniques, which spread throughout much of Western Europe and Japan.

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Means by which buyers and sellers are brought into contact with each other and goods and services are exchanged. The term originally referred to a place where products were bought and sold; today a market is any arena, however abstract or far-reaching, in which buyers and sellers make transactions. The commodity exchanges in London and New York, for example, are international markets in which dealers communicate by telephone and computer links as well as through direct contact. Markets trade not only in tangible commodities such as grain and livestock but also in financial instruments such as securities and currencies. Classical economists developed the theory of perfect competition, in which they imagined free markets as places where large numbers of buyers and sellers communicated easily with each other and traded in commodities that were readily transferable; prices in such markets were determined only by supply and demand. Since the 1930s, economists have focused more often on the theory of imperfect competition, in which supply and demand are not the only factors that influence the operations of the market. In imperfect competition the number of sellers or buyers is limited, rival products are differentiated (by design, quality, brand name, etc.), and various obstacles hinder new producers' entry into the market.

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In securities and commodities trading, a rising market. A bull is an investor who expects prices to rise and, on this assumption, buys a security or commodity in hopes of reselling it later for a profit. A bullish market is one in which prices are expected to rise. Seealso bear market.

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Trading in violation of publicly imposed regulations such as rationing laws, laws against the sale of certain goods, and official rates of exchange among currencies. Black-market activity is common in wartime, when scarce goods and services are often strictly rationed (see rationing). Black-market foreign-exchange transactions flourish in countries where convertible foreign currency is scarce and foreign exchange is tightly controlled.

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In securities and commodities trading, a declining market. A bear is an investor who expects prices to decline and, on this assumption, sells a borrowed security or commodity in the hope of buying it back later at a lower price, a speculative transaction called short-selling. Seealso bull market.

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Economic event in the U.S. that precipitated the Great Depression. The U.S. stock market expanded rapidly in the late 1920s and reached a peak in August 1929, when prices began to decline while speculation increased. On October 18 the stock market began to fall precipitously. On the first day of real panic, October 24, known as “Black Thursday,” a record 12,894,650 shares were traded. Banks and investment companies bought large blocks of stock to stem the panic, but on October 29, “Black Tuesday,” 16 million shares were traded and prices collapsed. The crash began a 10-year economic slump that affected all the Western industrialized countries.

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