The Stock Market Concept
As noted earlier, the securities once issued in the primary market become part of the secondary market. It provides a place or mechanism for active trading of securities among investors themselves. The stock market is a secondary market, which aids in the liquidity of securities traded thereon. When investors have to buy securities in the secondary market, they have to contact the securities broker for opening the account for the purchase of securities. After the account has been opened, the securities broker conveys the order of investors to the securities who handle the inventory of securities. There are two basic types of stock markets- the organized stock exchange and the over-the-counter market.
Organized Stock Exchanges
Organized stock exchanges are the physical locations where securities are traded under some established rules and regulations through the licensed members of the exchange. It is one of the important secondary markets where the investors buy and sell the securities between themselves. Organized stock exchanges facilitate the trading of securities, which are listed in them. This means the securities, which are not listed, are not traded in organized stock exchanges.
There are many organized stock exchanges around the world. One of the best known is the New York Stock Exchange (NYSE), which deals with the trading of the majority of total shares traded in the United States. Other well-known exchanges are London Stock Exchange, Tokyo Stock Exchange, Hong Kong Stock Exchange. There can be more than one stock exchange in a country, for example, Bombay Stock Exchange, Delhi Stock Exchange, Calcutta Stock Exchange in India. But, in the case of Nepal, Nepal Stock Exchange (NEPSE) is the only one organized stock exchange. Organized stock exchanges have the following features.
- They provide a floor for trading securities. Everyone buys and sell order of investors is executed on the floor of organized exchanges. No trade is allowed outside the floor of exchanges. However, NEPSE the only Stock Exchange in Nepal has introduced fully automated screen-based trading since 24th August 2007. The NEPSE trading system is called the ‘NEPSE Automated Trading System ‘(NATS). It is a fully automated screen-based trading system, which adopts the principle of an order-driven market.
- Organized exchanges appoint their members (known as brokers, dealers, market makers, etc.) to assist trading of securities. All investors must place their buy and sell orders through these members.
- Only listed securities are traded in organized exchanges. Organized exchanges set criteria for the listing of securities. Only those securities which meet those criteria are listed in the exchange and are qualified for trading.
Over—the—counter (OTC) markets were traditionally concerned with trading securities that were not listed in an organized stock exchange. However, today the securities listed in organized stock exchanges are also traded in the OTC market. OTC market is an informal type of market for securities where no compulsory listing of securities is required. Any security can be traded on the OTC market as long as a registered dealer is willing to make a market in the security (willing to buy and sell the security). It is not a central physical place like an organized exchange, rather it is the network of brokers and dealers scattered across the country. Buy and sell trades in an OTC market are conducted in the form of negotiated bidding through a network of communication lines and computer systems, which links brokers and dealers in the OTC market to their clients.
The brokers and dealers in the OTC market can compete with both investment bankers and the organized exchanges because they can operate in both primary as well as secondary markets. There is an international link of a communication system used by the brokers and dealers in the OTC market, which facilitates the investors for selection of most competitive market makers as opposed to being forced to trade with one monopolistic market maker. National Association of Securities Dealers Automated Quotation System (NASDAQ) in the United States and Over-the-Counter Exchange India (OTCEJ) in India are examples of OTC markets.
One significant advantage of the OTC market in the past was that it required less financial discloser. However, many OTC markets today require furnishing the same information that organized exchange provides for investors. Previously, the OTC market did not exist for corporate securities but it did for government securities in Nepal. However, the Nepal Stock Exchange now has been operating the OTC market since Jestha 2065 B.S. for de-listed securities and those securities which are not listed in the NEPSE. The trading of securities in the OTC market is not required to conduct through brokers.