Question

How stocks are traded in financial market?

Answer 1

Stock is traded in financial market

The concept of market is a place where a buyer fulfils his needs by getting his desired things. Another person called seller who provides the desired goods to the buyer to fulfil his wish against money. Therefore, the place where this buying and selling occurs is termed as market. Likewise, a stock market or a financial market is a place where buying and selling of shares generally takes place. Here a listed company of the respective stock market known as stock exchange issues shares (initial public offering) to the public to collect the money of such issuance which is considered as a share or equity capital of that listed company. The purchaser of such shares or equity is called the share holder who owns the partial ownership( fractional ownership right) of the company by virtue of purchasing the quantity of shares. The primary shares which is transacted in the stock market can be sold afterwards. So in the stock market in one side new born shares are issued on the other hand these newly issued shares have got the way to be transacted in the future when the purchaser of such shares sell it in the later period to another purchaser.

Therefore, the stock market helps the investor to collect their desired shares and also the listed companies who possess the money quickly and use it accordingly.

Since the stock market is primarily a place of equity transaction so the ownership right can be possessed by the equity holder and for the issuance company such issue of shares is not considered as a burden as it is with interest payment which happens against collection of debt capital as in the debt capital, interest must have to be paid periodically to the debt holder. In case of equity capital the company when declares dividend from the available profits than it may announce to pay dividend to its equity holder. Therefore, in the stock market a listed company avoids debt payment and interest payment to the debt holder.

Another very helpful factor for the issued company or the holder of such financial instrument is that when the indices of the stock market soars to higher direction generally the price of the share gets increased and thus it helps the seller to sell the shares and earn profit over buying price. Conversely, when the market is getting down a holder holds the share until the market becomes fit for the positive transaction. However, this dull time is considered well for the buyer as it enables a buyer to purchase shares of good companies due to the lower price of these shares because once the market goes high the price of the shares also moves according to that trend hence the price of the shares goes expensive which becomes difficult to buy at that time.

We have known stock market facilitates the buyer and the seller to make equity transaction. Therefore, safety and security are two important factors that need to be prevailed in the financial market. Security and exchange mission is such a body which protects the interest of both buyer and the seller.

Apart from stock exchange there lies another trading point of shares known as over the counter exchange (OTC) although the regulation exercised in the stock exchange is supposed to be not maintained in the case of OTC. So the question of minimum price of a share to be maintained under stock exchange is not a restriction here. On the other hand since the stock exchange is more reliable than the OTC due to the presence of regulation so in the matter of safety and security of an investor OTC is not right place to invest comparing it with stock exchange.

In the share market when a buyer of a share considers the purchase price is maximum beyond which he becomes unwilling to purchase then such maximum price of the share is called bid price. Again when a seller considers a sell price is minimum below which he does not intend to sell is considered as his ask price. The difference between these two prices is called spread. In the OTC a trading transaction may maintain large spread whereas, as far as liquidity is concerned we see small spread i.e. a small gap between bid price and ask price prevails in the stock market. So exchange market is much more liquid than the OTC market.

The participants of the stock market

When a company wants to issue shares in the stock market or financial market it contracts with an investment bank which acts as an underwriter to complete the task of issuance towards public offering against certain percentage of commission. The role of underwriter is to check the current financial position of the company. How much ownership the probable issued company can sacrifice in the form of equity. Then the probable best price of the equities to be declared in the market at the right time so that all the issued shares would have been sold in the market which enables the company to fetch its desired capital.

The initial public offer (IPO) is generally purchased by institutional investors.

Bank, insurance companies, mutual fund corporations etc are called institutional investors.

IPO trading market is known as primary market. Whatever transaction takes place in the latter period it will be occurred in the secondary market of that particular shares which once issued in the primary market.

A few players exist in such financial market who play pivotal role in the share transaction like fund managers, hedge fund managers etc who transact with big block of shares and thus influence the market to move to a particular direction. For example, if exchange traded manager seeks to purchase a huge volume of particular shares that has some demand in the market. Such huge investment leads to up rise the price of that share. In NASDAQ, NYSE exchanges we get the proof of such circumstances.