Question

Analyse the policies and procedures relating to the trading of securities and new issues in the world market.(30)

Answer 1

Trade arises from differences in investment goals, risk exposures, and beliefs about security values. People who are identical in all these respects would want, at any proposed price, to trade in the same direction (buy or sell), and a trade requires both a buyer and a seller. A potential buyer and seller might differ in many ways, large and small. But to get a big picture of the market, it is useful to think about broad groups or clienteles. Investors are sometimes categorized on the basis of investment horizon. Long-term investors include institutions like endowment funds and individuals saving for retirement or a child’s education. Medium-term investors have holding periods are on the order of a business cycle (3-5 years).

These investors often seek to profit from changes in relative valuations of securities. Short-term traders have holding periods ranging from minutes to a few months. Traders may also be classified by motive. There are many possible motives, of course, but the most important is information concerning the intrinsic value of the security. If our counterparty has superior information (most obviously of the illegal “insider” sort), then we are much more likely to lose. Informational traders usually need to trade quickly (before their information is made fully public) and stealthily (to avoid detection).

Most countries recognize the crucial role that a well-functioning security market plays in raising capital, allocating capital, and hedging. Due to the broad extent of these markets, the most visible regulation usually exists at the national level, supplemented by efforts at consistency, cooperation and coordination to manage trans-national concerns. The pre-eminence of national regulation does not imply, however, that all markets and aspects of trading are closely overseen by federal governments.