Understanding the proportion Market

Understanding the proportion Market




“The Stock Market” is the name given to the association formed by brokers who do business together. proportion markets bring together the buyers and the sellers of stocks or bonds.

A corporation creates (“issues”) shares of stock to represent ownership claims in the corporation. Stockholders know that the value of their stock will fluctuate with the value of the assets owned by the corporation and with the business prospects of its operations.

In virtually all instances, a corporation designs its shares of stock in a way that allows for their resale and trading. The first time that a specific proportion of stock is sold is when the corporation issues and sells it.

This is called a dominant dispensing. In contrast, all later trading of the same shares of stock-that is, before issued shares-is called a secondary market transaction. This kind of transaction transfers ownership from one person to another without involving the corporation that originally issued the stock.

The popular image of the proportion market is that of secondary market trading. Secondary market transactions take place either by a formally organized “exchange” or by an “over-the-counter” (OTC) network of dealers and brokers.

The dominant sale of stock, however, is usually done by “syndicates” of investment edges (see investment banking) and retail brokerage houses that directly contact possible buyers of the new stock offering. The quantity of trading of “old” shares far exceeds the initial sale of “new” shares.

Operation of Stock Exchange

An exchange decides what securities (stocks and bonds) and contracts (see option trading and futures) it wants to trade. As a first step, an exchange proposes to organize a “market” to trade a specific security or contract; with stocks, this step is the “listing” of the stock.

Most exchanges will not list the stock of a company that does not meet minimum standards of operation, as set by the individual exchange. An exchange can also decide to “delist” a stock after the company has failed to meet its standards for some time. More than one exchange can list the same stock.

An exchange is a private organization. Its members-who may be either individuals or firms-are responsible for the organization and financial integrity of the markets. The main assistance of membership is direct access to the trading and sustain systems; all nonmembers must position for a member to trade on their behalf. The charter of an exchange limits the number of members, but it does allow a member to rent or sell his or her membership to someone else.

An basic characterize of any exchange-sponsored market is the provision of “market-making” sets. Market makers stand ready to quote a price at which they are willing to buy-a “bid” (price)-and a price at which they are willing to sell-an “ask” (price).

The difference between the ask and the bid-the “bid-ask spread”-is one measure of the cost to the customer of using the market. In general, a well-functioning market is one in which orders can be executed quickly and at prices that mirror a thin bid-ask spread.

Most stock exchanges assign the market-making duties for each stock to a “specialist” who is principally responsible for the operation of that market. A specialist is always ready to quote bid and ask prices and to trade closest for his or her own account. In addition, the specialist maintains a “book” of orders placed by others and executes these orders as the market price changes.

Securities Transactions

The general public can use an exchange’s markets by setting up an account with a brokerage that is an exchange member (or that trades by another firm that is an exchange member).

A customer can provide his or her broker with a long list of instructions about when to trade and at what price, but in general, customers submit two types of orders: limit orders and market orders. A limit order tells the broker to buy (or sell) only at a price no greater (or no less) than the limit set by the customer. A market order tells the broker to execute the trade closest at in any case price is required.

The broker sends the customer’s order to the floor of the exchange, either by phone or by a computer network. On the floor the order is filled at the best possible price, which may be provided by a market maker or by a broker representing another public customer. In the case of a limit order, if the current bid and ask prices are unsatisfactory, the order is left with the specialist (or another market maker) for execution in the event of a price movement.

Once a trade is negotiated on the floor of an exchange, by an upstairs firm or by the OTC market, the buyer must nevertheless pay for the stock, and the seller must deliver it to the buyer. These follow-up activities are part of the “clearing” and “settlement” procedures.

Each exchange uses the sets of a clearing corporation. The members of a clearing corporation are those exchange members who agree to the additional financial requirements and responsibilities imposed by the clearing corporation. All members of an exchange must either be a member of the clearing corporation or position to “clear” their trades by a clearing member.

At the end of the day each clearing member reports the number of shares of each stock bought and sold and the prices at which the trades occurred. The clearing corporation reconciles the reports of all clearing members. When and if all reports are complete and fully accurate, the total reports of the buyers exactly match the total reports of the sellers.

“Settlement” refers to the payment and the move of title. Most stock transactions are settled on the fifth business day after the trade is negotiated. In contrast, option- and futures-contract transactions are settled on the next business day after the trade. Clearing member firms are responsible for settling their customers’ trades already if the customers fail to deliver the necessary cash or securities.

Customers continue either a cash account or a margin account with their brokers. With a cash account, a customer must fully pay within seven business days; except for any balances due within seven days of a buy, a cash-account customer can have no other noticeable obligations to his or her broker. A margin account, however, is designed to allow customers to have noticeable obligations, as long as they continue collateral in the account as a good-faith place.

A customer’s obligations can arise from any of three supplies. He or she can borrow money from the broker (presumably to help pay for the stock purchases) or can borrow stock from the broker (presumably to sell it “short” and keep the proceeds; “selling short” is selling securities one does not own). Or the customer can write an option contract, committing him or her to buy (or sell) at a later date at prices that could be above (or below) the then prevailing market price. The exchange sets rules that specify the amount of collateral that customers with such obligations must keep in a margin account.

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