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Understanding the Share Market

July 05, 2012 | Comments: 0 | Views: 196

"The Stock Market" is the name given to the association formed by brokers who do business together. Share markets bring together the buyers and the sellers of stocks or bonds.

A corporation creates ("issues") shares of stock to represent ownership claims in the corporation. Stockholders know that the value of their stock will fluctuate with the value of the assets owned by the corporation and with the business prospects of its operations.

In virtually all instances, a corporation designs its shares of stock in a way that allows for their resale and trading. The first time that a specific share of stock is sold is when the corporation issues and sells it.

This is called a primary distribution. In contrast, all subsequent trading of the same shares of stock-that is, previously issued shares-is called a secondary market transaction. This type of transaction transfers ownership from one person to another without involving the corporation that originally issued the stock.

The popular image of the share market is that of secondary market trading. Secondary market transactions take place either through a formally organized "exchange" or through an "over-the-counter" (OTC) network of dealers and brokers.

The primary sale of stock, on the other hand, is usually done through "syndicates" of investment banks (see investment banking) and retail brokerage houses that directly contact potential buyers of the new stock offering. The volume of trading of "old" shares far exceeds the initial sale of "new" shares.

Operation of Stock Exchange

An exchange decides what securities (stocks and bonds) and contracts (see option trading and futures) it wants to trade. As a first step, an exchange proposes to organize a "market" to trade a specific security or contract; with stocks, this step is the "listing" of the stock.

Most exchanges will not list the stock of a company that does not meet minimum standards of operation, as set by the individual exchange. An exchange can also decide to "delist" a stock after the company has failed to meet its standards for some time. More than one exchange can list the same stock.

An exchange is a private organization. Its members-who may be either individuals or firms-are responsible for the organization and financial integrity of the markets. The main benefit of membership is direct access to the trading and support systems; all nonmembers must arrange for a member to trade on their behalf. The charter of an exchange limits the number of members, but it does allow a member to rent or sell his or her membership to someone else.

An essential feature of any exchange-sponsored market is the provision of "market-making" services. Market makers stand ready to quote a price at which they are willing to buy-a "bid" (price)-and a price at which they are willing to sell-an "ask" (price).The difference between the ask and the bid-the "bid-ask spread"-is one measure of the cost to the customer of using the market. In general, a well-functioning market is one in which orders can be executed quickly and at prices that reflect a narrow bid-ask spread.

Most stock exchanges assign the market-making duties for each stock to a "specialist" who is principally responsible for the operation of that market. A specialist is always ready to quote bid and ask prices and to trade immediately for his or her own account. In addition, the specialist maintains a "book" of orders placed by others and executes these orders as the market price changes.

Securities Transactions

The general public can use an exchange's markets by setting up an account with a brokerage that is an exchange member (or that trades through another firm that is an exchange member).

A customer can provide his or her broker with a long list of instructions about when to trade and at what price, but in general, customers submit two types of orders: limit orders and market orders. A limit order tells the broker to buy (or sell) only at a price no greater (or no less) than the limit set by the customer. A market order tells the broker to execute the trade immediately at whatever price is required.

The broker sends the customer's order to the floor of the exchange, either by phone or through a computer network. On the floor the order is filled at the best possible price, which may be provided by a market maker or by a broker representing another public customer. In the case of a limit order, if the current bid and ask prices are unsatisfactory, the order is left with the specialist (or another market maker) for execution in the event of a price movement.

Once a trade is negotiated on the floor of an exchange, through an upstairs firm or through the OTC market, the buyer must still pay for the stock, and the seller must deliver it to the buyer. These follow-up activities are part of the "clearing" and "settlement" procedures.

Each exchange uses the services of a clearing corporation. The members of a clearing corporation are those exchange members who agree to the additional financial requirements and responsibilities imposed by the clearing corporation. All members of an exchange must either be a member of the clearing corporation or arrange to "clear" their trades through a clearing member.

At the end of the day each clearing member reports the number of shares of each stock bought and sold and the prices at which the trades occurred. The clearing corporation reconciles the reports of all clearing members. When and if all reports are complete and fully accurate, the total reports of the buyers exactly match the total reports of the sellers.

"Settlement" refers to the payment and the transfer of title. Most stock transactions are settled on the fifth business day after the trade is negotiated. In contrast, option- and futures-contract transactions are settled on the next business day after the trade. Clearing member firms are responsible for settling their customers' trades even if the customers fail to deliver the necessary cash or securities.

Customers maintain either a cash account or a margin account with their brokers. With a cash account, a customer must fully pay within seven business days; except for any balances due within seven days of a purchase, a cash-account customer can have no other outstanding obligations to his or her broker. A margin account, on the other hand, is designed to allow customers to have outstanding obligations, as long as they maintain collateral in the account as a good-faith deposit.

A customer's obligations can arise from any of three sources. He or she can borrow money from the broker (presumably to help pay for the stock purchases) or can borrow stock from the broker (presumably to sell it "short" and keep the proceeds; "selling short" is selling securities one does not own). Or the customer can write an option contract, committing him or her to buy (or sell) at a later date at prices that could be above (or below) the then prevailing market price. The exchange sets rules that specify the amount of collateral that customers with such obligations must keep in a margin account.

Go to http://www.barefootsharetrading.com to learn how you can get involved and make a consistent income from the share market by investing no more than 15 minutes a day!

If you've watched your retirement savings take a dive, your job "security" go out the window, and your way of life look as though it's threatened, then it's time you took some action. Many of us are facing the same problems and struggling to make ends meet month after month. The best investment you can make is in yourself. Only you can change this, and there's plenty of help to get you there. Learning how to trade shares is a sure fire way to generate a consistent income, no matter what the market conditions are.

Go to http://www.barefootsharetrading.com right now to learn more.

Source: EzineArticles
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