Securities Market

Securities business sector is a segment of the more extensive money related business sector where securities can be purchased and sold between subjects of the economy, on the premise of interest and supply. Securities markets encompases value markets, security markets and subordinates markets where costs can be resolved and members both expert and non experts can meet.

Securities markets can be part into two levels. Essential markets, where new securities are issued and optional markets where existing securities can be purchased and sold. Optional markets can further be part into composed trades, such stock trades and over-the-counter where singular gatherings meet up and purchase or offer securities straightforwardly. For securities holders realizing that an optional business sector exists in which their securities might be sold and changed over into money expands the readiness of individuals to hold stocks and securities and subsequently builds the capacity of firms to issue securities.

There are various expert members of a securities market and these incorporate; businesses, agent merchants, market creators, venture directors, examiners and also those giving the framework, for example, clearing houses and securities storehouses.

A securities market is used in an economy to attract new capital, transfer real assets in financial assets, determine price which will balance demand and supply and provide a means to invest money both short and long term.

Conditions

A securities market is a system of interconnection between all participants (professional and nonprofessional) that provides effective conditions:

  • to attract new capital by means of issuance new security (securitization of debt),
  • to transfer real asset into financial asset,
  • to invest money for short or long term periods with the aim of deriving profitability.
  • commercial function (to derive profit from operation on this market)
  • price determination (demand and supply balancing, the continuous process of prices movements guarantees to state correct price for each security so the market corrects mispriced securities)
  • informative function (market provides all participants with market information about participants and traded instruments)
  • regulation function (securities market creates the rules of trade, contention regulation, priorities determination)
  • Transfer of ownership (securities markets transfer existing stocks and bonds from owners who no longer desire to maintain their investments to buyers who wish to increase those specific investments.
  • Insurance (hedging) of operations though securities market (options, futures, etc.)

Levels of securities market

Primary market

The primary market is that part of the capital markets that deals with the issue of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is a public offering. Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market.

Features of primary markets are:

  • This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore, it is also called the new issue market (NIM).
  • In a primary issue, the securities are issued by the company directly to investors.
  • The company receives the money and issues new security certificates to the investors.
  • Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
  • The primary market performs the crucial function of facilitating capital formation in the economy.
  • The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as “going public.”

Secondary market

The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold. The term “secondary market” is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a “second” or “third” market has developed for use in ethanol production). Stock exchange and over the counter markets.

With primary issuances of securities or financial instruments, or the primary market, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries. After the initial issuance, investors can purchase from other investors in the secondary market.

The secondary market for a variety of assets can vary from loans to stocks, from fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are the most visible example of liquid secondary markets – in this case, for stocks of publicly traded companies. Exchanges such as the New York Stock Exchange, Nasdaq and the American Stock Exchange provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products trade “over the counter,” or by phoning the bond desk of one’s broker-dealer. Loans sometimes trade online using a Loan Exchange.

Main financial instruments

Bond, Promissory note, Cheque – a security contains requirement to make full payment to the bearer of cheque, Certificate of deposit, Bill of Lading (a Bill of Lading is a “document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods.” ), Stock.

Promissory note

A promissory note, referred to as a note payable in accounting, or commonly as just a “note”, is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOUs in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.

Certificate of deposit

A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are “money in the bank” (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.

Bond

Bond – an issued security establishing its holder’s right to receive from the issuer of the bond, within the time period specified therein,

  • its nominal value
  • and the interest fixed therein on this value or other property equivalent.

The bond may provide for other property rights of its holder, where this is not contrary to legislation.

Stocks (shares)

Common shares

Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, and preferred shareholders are paid.

Preferred share

Preferred share represents some degree of ownership in a company but usually doesn’t come with the same voting rights. (This may vary depending on the company.) With preferred shares investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity.

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