The securities markets provide a regulated framework for efficient mobilization of capital from investors to businesses in the financial system.
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What are securities markets?
Security Market is that component of the wider financial market where securities are traded means bought and sold between subjects of the economy, on the basis of demand and supply. Securities markets can be divided into two levels: The primary market is the new security issue market and another one is the secondary market where existing securities are traded. The securities market includes the stock market, bond market, and derivative markets.
- It provides means to invest money for the short-term and long-term.
- It connects investors who want to liquidate and sell their securities to those investors who want to buy those securities.
- It connects companies that require capital to function with the investors with capital who are looking for a return on their capital.
- It helps in diminishing the risk involved in purchasing securities by providing hedging options for investment.
- The securities market helps to evaluate the price of certain companies and even the economy as a whole.
- It attracts new capital.
- It transfers real assets into financial assets.
- It determines prices that can balance the demand and supply of financial assets.
Key Intermediaries in the Securities Market:
- Portfolio managers / Asset Management Company
- Investment Bankers
- Clearing members
- Registrars & Transfer Agents
- Investment advisers
- Credit Rating Agencies
Types of Securities Markets:
- Quote-driven Markets:
A Quote-driven market is one of the type of secondary market trading structures where trades are executed electronically through dealers. The dealers are market makers who post bid and ask prices for traders and keep an inventory of securities. A quote-driven market is more liquid than other types of securities market. In the Quote-driven market, dealers fill orders from their own inventory or by matching them with other orders. It is also known as a price-driven market.
For Example, if an individual named ‘A’ places an order for 100 shares of XYZ stock @50/share. In this system, if there is only one market maker, he might post its bid @49.50 and ask @50.50. This means ‘A’ could buy shares of XYZ stock @50.50 and sell shares @49.50. This is all which would be displayed unless there is more than one market maker. As an individual investor, A’s order for 100 shares of XYZ stock @50/share would not be posted in the system.
Example: London Stock Exchange, e-speed government bond trading system
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- Order-driven Markets:
In an Order-driven market, buyers and sellers place orders for securities they want to buy or sell. The price and number of securities required to be bought or sold are specified in the order. This order can be a market order or limit order. Order-driven markets are transparent and work with the flow of buy and sell orders from the market participants. This market rank orders based on price. In short, the lowest sell order and highest buy order is matched.
For Example, if an individual named ‘A’ places an order for 100 shares of XYZ stock @50/share. A’s order will be displayed in the system and can be seen by people with access to this level of information.
Example: National Stock Exchange of India Ltd.
While it looks like all securities markets are similar, they can be structured in various ways. Order-driven markets display all the available bids and offer whereas Quote-driven market focus solely on the bids and asks of market makers.