In: Accounting
You have been recently hired by Bank of Wealth Investment Brokers as a Portfolio Analyst. On your first day in the position, the Portfolio Manager requested that you design a short in-service training session for the new research interns in your department on the mechanics of the primary and secondary markets, including the various types of security regulators and a brief history of the stock market.
You will need to develop an Information Sheet that explains the similarities and differences between the primary and secondary markets, a list of security regulators and their functions, and a brief overview of the stock market. An Information Sheet will provide brief and clear information on the required subjects. Often, bullet points and question and answers are used in an Information Sheet; however, since interns will be expected to know and understand the material thoroughly, your Information Sheet should be more detailed and offer supporting evidence, including a reference list.
The world has been witnessing tremendous developments in various fields over the decades. This has turned the world into a competitive market where every individual wants to grow and earn good profits. Years ago, merchants wanted to start or expand their businesses.
What would first strike one's mind when spoken about setting up of large business units or the expansion of the existing ones?
It is capital.
These merchants did not have enough capital to support their business growth and expansion. This paved way to the formation of joint stock companies where people, so called investors, brought together their savings and established business units. These investors became the partners or co-owners of the business unit and held individual shares in the business. This model was first adopted by the Dutch and was subsequently followed by several other nations.
As the developments and the competition in the market kept growing the countries started trading with each other. This triggered the requirement for an exchangeable medium which could facilitate the shareholders to trade their stocks with each other. As a result the first paper share was issued by the Dutch East India Company in the 17th Century. The idea of buying and selling shares eventually spread across the globe.
What could be the consequence of the popularity of this idea of 'trading 'spreading across the globe?
The immediate consequence would be the increase in the volume of shares bought and sold in the market. Now, the requirement of conducting this trading activity in an organised manner arises.
The traders need to meet at a place to buy and sell their shares which could commonly be called a market place or a 'stock market'. Later, this market place became popular in the name of 'stock exchange'. The London stock exchange was the first stock exchange established in the 18th century.
Several stock exchanges came into existence over the years. This has tremendously helped businesses and other individual to address their financial needs.
The stock market may be divided into two types
1) Primary Market
2) Secondary Market
Differences
Particulars | Primary Market | Secondary Market |
What does it mean? | Place where new shares are created | Previously issued shares are traded here |
What is the number of times the shares can be sold? | Once | Many times |
Who are the parties involved? | Company and Investors Intermediary: Underwriters | Investors only Intermediary: Brokers |
What is the nature of the share price? | Fixed | Fluctuates |
Whom does it supply funds and who will get the amount on selling of shares? |
Startups and existing companies for expansion. Company will get the amount on sale. |
It does not supply funds to the enterprises Investors will get the amount of sale |
Similarities
1) The shares issued in the primary market and the secondary market are listed on the recognised stock exchanges.
2) The trading of the shares are significatly controlled by the stock exchanges.
Who regulates the stock markets and what are their roles
The New York Stock Exchange, NASDAQ, The London Stock Exchange and The Bombay Stock Exchange are some of the popular stock exchanges in the world. The trading activities are regulated by the stock exchange boards and commissions of their respective nations.
Examples
1) The US Securities and Exchange Commission ( SEC) regulates the stock markets in the United States and protects the investors from fraud and other malpractices.The Financial Industry Regulatory Authority ( FINRA) regulates the stock brokers and brokerage companies.
2) Stock Exchange in India is governed by SEBI, Stock Exchange Board of India. It governs the entire activity of trading.