Page 59 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes in this market are usually large. The retail market is the market in which the individual
investors buy and sell securities.
3. Exchanges in the wholesale secondary market for capital securities may take place in
either of the two markets, viz., Over-the counter market (OTC) and organized exchange
market. Where the organisation is more structured and communication is often face-to-
face, the market is known as an organised exchange. Generally, the secondary market for
government securities is an OTC market, and that the secondary market for corporate
equities consists of both OTC markets and exchanges. The wholesale market for bonds in
the US is principally an OTC market; fewer than 10% of all issues traded in the stock
exchanges.
Thus, an organised exchange market is characterised as auction market that uses floor traders
who specialise in particular stocks. Exchange rules govern trading to ensure the efficient and
legal operation of the exchange and the exchange board constantly reviews these rules to ensure
that they result in competitive trading. In about 90% of trades, the specialist matches buyers
with sellers. In the other 10%, the specialist may intervene by taking ownership of the stock
themselves or by selling stock from inventory.

Notes Unlike organised exchanges, OTC markets have market makers. Rather than trading
stocks in an auction format, they trade on an electronic network where bid and ask prices
are set by market makers.

3.4.1 Importance of Secondary Market

The secondary market plays crucial role in economic and industrial development of a country
through promoting capital formation and efficient allocation of capital. Secondary market
promotes capital formation by assisting in the effective mobilisation of savings and their
canalisation into appropriate avenue of investment. It does by providing an organized market
in diverse types of securities to suit the varying notions and whims of a vast mass of savers
about liquidity, profitability and risk element in their investments. The opportunity of constant
evaluation of returns on one’s investment compared to others, the liquidity that is imported to
investment in fixed capital and price continuity that it ensures, instil confidence in the minds of
savers. On the other hand, by creating conditions which reasonably ensure availability of financial
resources for creating real capital, whether in private or public sector, they give impetus to
development.
A secondary market increases economic efficiency. An organised exchange helps allocate
capital more efficiently by establishing fair prices for securities and by minimising the
costs of buying and selling them. A secondary market also helps in directing flow of
savings into promising industries and checks the flow of capital in uneconomic and less
profitable ventures. This, the secondary market seeks to achieve through keeping an eye
on the exchanges. A permanent surge in share price of a particular industry suggests that
more capital can be absorbed by the industry with the advantage. On the contrary, if share
price in an industry registers continued fall, it suggests that the industry cannot absorb the
capital profitably. Through price mechanism, the secondary market prevents gluts and
scarcities of capital as between different industries and avoids misalignments between
supply of capital and the demands of industry and effects economies in the use of capital.

Secondary market also facilitates an investor to shift from one type of investment to
another according to his investment priorities without any significant depreciation in its
real value. Accordingly, an investor does not get tied for the better or for the worse, to the

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