STOCK MARKET
A stock market is a market for the trading of
company stock, and derivatives of same; both of these are
securities listed on a stock exchange as well as those only
traded privately.
The term 'the stock market' is a concept for the mechanism that enables the
trading of company stocks, other securities, and derivatives. Bonds are still
traditionally traded in an informal, over-the-counter market known as the bond
market. Commodities are traded in commodities markets, and derivatives are traded
in a variety of markets (but, like bonds, mostly 'over-the-counter').
The size of the worldwide 'bond market' is estimated at $45 Trillion. The
size of the 'stock market' is estimated as about half that. The world derivatives
market has been estimated at about $300 Trillion. The major U.S. Banks alone are
said to account for about $100 Trillion. It must be noted though that the derivatives
market, because it is stated in terms of notional outstanding amounts, cannot be
directly compared to a stock or fixed income market, which refers to actual value.
The stocks are listed and traded on stock exchanges which is an entity (a
corporation or mutual organization) in the business of bringing buyers and sellers
of stocks and securities together. The stock market in the United States includes the
trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on
the many regional exchanges, the OTCBB, and Pink Sheets. European examples of
stock exchanges include the Paris Bourse (now part of Euronext), the London Stock
Exchange and the Deutsche Brse.
TRADING
Participants in the stock market range from small individual stock investors
to large hedge fund traders, who can be based anywhere. Their orders usually end
up with a professional at a stock exchange, who executes the order.
Most stocks are traded on exchanges, which are places where buyers and
sellers meet and decide on a price. Some exchanges are physical locations where
transactions are carried out on a trading floor, by a method known as open outcry.
(You've probably seen pictures of a trading floor, in which traders are wildly
throwing their arms up, waving, yelling, and signaling to each other.) This type of
auction is used in stock exchanges and commodity exchanges where traders may
enter "verbal" bids and offers simultaneously. The other type of exchange is a
virtual kind, composed of a network of computers where trades are made
electronically via traders at computer terminals.
Actual trades are based on an auction market paradigm where a potential
buyer bids a specific price for a stock and a potential seller asks a specific price for
the stock. (Buying or selling at market means you will accept any bid or ask price
for the stock.) When the bid and ask prices match, a sale takes place on a first come
first serve basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities
between buyers and sellers, thus providing a marketplace (virtual or real). Just
imagine how difficult it would be to sell shares (and what a disadvantage you
would be at with respect to the buyer) if you had to call around trying to locate a
buyer, as when selling a house. Really, a stock exchange is nothing more than a
super-sophisticated farmers' market providing a meeting place for buyers and
sellers.
The New York Stock Exchange is a physical exchange, where much of the
trading is done face-to-face on a trading floor. This is also referred to as a "listed"
exchange (because only stocks listed with the exchange may be traded). Orders
enter by way of brokerage firms that are members of the exchange and flow down
to floor brokers who go to a specific spot on the floor where the stock trades. At
this location, known as the trading post, there is a specific person known as the
specialist whose job is to match buy orders and sell orders. Prices are determined
using an auction method known as "open outcry": the current bid price is the
highest amount any buyer is willing to pay and the current ask price is the lowest
price at which someone is willing to sell; if there is a spread, no trade takes place.
For a trade to take place, there must be a matching bid and ask price. (If a spread
exists, the specialist is supposed to use his own resources of money or stock to
close the difference, after some time.) Once a trade has been made, the details are
sent back to the brokerage firm, who then notifies the investor who placed the
order. Although there is a significant amount of direct human contact in this
process, computers do play a huge role in the process, especially for so-called
"program trading".
The Nasdaq is a virtual (listed) exchange, where all of the trading is done by
computers. The process is similar to the above, in that the seller provides an asking
price and the buyer provides a bidding price. However, buyers and sellers are
electronically matched. One or more Nasdaq market makers will always provide a
bid and ask price at which they will always purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext is an order-driven, electronic stock
exchange. It was automated in the late 1980s. Before, it consisted of an open outcry
exchange. Stockbrokers met in the trading floor or the Palais Brongniart. In 1986,
the CATS trading system was introduced, and the order matching process was fully
automated.
MARKET PARTICIPANTS
Many years ago, worldwide, buyers and sellers were individual investors,
such as wealthy businessmen, with long family histories (and emotional ties) to
particular corporations. Over time, markets have become more institutionalized;
buyers and sellers are largely institutions (e.g., pension funds, insurance companies,
mutual funds, hedge funds, investor groups, and banks). The rise of the institutional
investor has brought with it some improvements in market operations (but not
necessarily in the interest of the small investor or even of the nave institutions, of
which there are many). Thus, the government was responsible for "fixed" (and
exorbitant) fees being markedly reduced for the 'small' investor, but only after the
large institutions had managed to break the brokers' solid front on fees (they then
went to 'negotiated' fees, but only for large institutions).
However, corporate governance (at least in the West) has been greatly
affected by the rise of institutional 'owners.'
DERIVATIVE INSTRUMENTS
Financial innovation has brought many new financial instruments whose
pay-offs or values depend on the prices of stocks. Some examples are exchange
traded funds (ETFs), stock index and stock options, equity swaps, single-stock
futures, and stock index futures. These last two may be traded on futures exchanges
(which are distinct from stock exchangestheir history traces back to commodities
futures exchanges), or traded over-the-counter. As all of these products are only
derived from stocks, they are sometimes considered to be traded in a (hypothetical)
derivatives market, rather than the (hypothetical) stock market.
BROKER
A broker is a member of a recognized stock exchange, who is permitted to
do trades on the screen-based trading system of different stock exchanges. He is
enrolled as a member with the concerned exchange and is registered with SEBI.
SUB BROKER
A sub broker is a person who is registered with SEBI as such and is
affiliated to a member of a recognized stock exchange.
