Security Trading In A Stock Exchange Market
Firms need to raise capital to invest their projects and to keep their companies operating. There are two different types of markets; the primary and secondary market. Securities are created in the primary market. An example of a primary market is an initial public offering (IPO). An IPO happens when a private company offers its stocks to the public for the first time. For example, in 2012 Facebook held its IPO. Although this IPO was one of the biggest in technology, it turned out to be a disappointment. The offer price was set at $38, but 6 days after the IPO it fell 9. 6% below the offer price. The secondary market’s purpose is to buy equities. This market includes the New York Stock Exchange (NYSE) and NASDAQ. This is where investors trade securities without the company’s involvement. For example, if you buy Coca-Cola (KO) stock, you’re dealing with investors who also own shares in the same stock. Coca-Cola is not involved in the transaction. Companies such as Coca-Cola and Facebook are public traded companies. These companies become public when they issue securities through an initial public offering (IPO) and are traded through a stock exchange market.
A seasoned equity offering is a new equity that is issued by a company that is already publicly traded. Investment bankers take on the role of underwriters when they market public offerings. Firms are advised by the investment bankers concerning when they should sell their securities. Companies must register a preliminary registration statement with the Securities and Exchange Commission (SEC). There are four different types of markets where securities are traded; direct search, brokered markets, dealer markets, and auction markets. In the direct market, buyers and sellers attempt to find each other. An example of this would be the transaction of Dodger tickets that take place on StubHub. The seller advertises the tickets while the buyer is looking for tickets to purchase. The brokered market is where brokers search for both buyers and sellers. The book provides the example of the real estate market where real estate agents are looking for available homes and prospective home buyers.
The dealer market is where dealers post their own prices at which they will buy or sell. Dealers buy their own assets and sell them off a profit. The auction market is where buyers and sellers meet to trade. An example of the auction market is the New York Stock Exchange (NYSE). There are two types of orders; market orders and price-contingent order (ex. limit order, stop order and stop-limit order). The book defines a market order as a buy or sell order that should be executed immediately at the current market prices. Limit orders are self-explanatory where securities are bought or sell either at a specified “limit” price or a better price. Stop orders resemble limit orders, however, securities are bought or sell when a set “stop” price is reached to limit losses. A stop-limit order combines the stop order and limit order. Here both the stop and limit order limitations need to be met.
A short sale is where the seller does not own the security. In these sales, a trader sells the stocks and then buys them. For example, if a trader were to believe a certain stock which is trading at $80, will drop in price and ends up buying and selling 200 shares then he ends up short 200 shares. The trader did not own the 200 shares he bought. The seller ends up making a profit but in turn, also needs to replace these shares. The trader must also pay dividends to the lender of the security.
