Page 66 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 3: Primary Market and Secondary Market

Stop orders are activated, only when the price of the stock reaches or passes through a Notes
predetermined limit. The price that activates the trade is called stop price. Once a trade takes
place at the stop price, the order becomes a market order. Thus, a stop loss order can be viewed
as a conditional market order. A stop buys order becomes a market buy, when the trades of
others equal or exceed the stop price. The investor might place a stop loss order increasing the
stop price, if the shares continue to rise. As with all market orders, the actual price the shares will
trade at is uncertain because the trade prices might move below the stop price before the stop
loss order can be executed.
A stop buy order is often used, in conjunction with a short sale. Since the share must be replaced
following a short sale, any price increase harms the short seller. A stop buy order serves to limit
the amount of loss, the short seller can incur.

An investor must specify the length of time an order is outstanding for orders other than market
orders. A day order instructs the broker to fill the order by the end of the day. If, it is not filled
by end of the day, it is automatically cancelled. If the investor does not specify the length of time,
it is assumed to be, a day order. A week or month order is to be filled by the end of that period
or cancelled. Good until cancelled orders, remain outstanding until the investor specifically
cancels the order. Fill or kill order instructs the broker to fill the order immediately or to kill the
order. Spot transactions require settlement by delivery and payment on the date of contract, or
next day. A clearing house facilitates the clearing of contracts, delivery of securities, and payments
between members.
Stocks, not listed on the organised exchanges, are traded in the over-the-counter (OTC) market.
Like the organised exchanges, the OTC market also facilitates secondary market transactions
but does not have a trading floor. Instead, buy and sell orders are completed through a
telecommunication network. Because there is no trading floor, there is no need to buy a seat to
trade on this exchange, but it is necessary to register with it.
Trading on stock exchanges is done through brokers and dealers. All members can act as brokers
and for this purpose they have to maintain security deposits. Brokers act as agents, buying and
selling or others for which they receive brokerage commission at stipulated rates. Dealers act as
principals and sell securities on their own accounts.
However, members cannot enter into contract with any person other than a member without
prior permission the governing body. Given below are the key members of the stock exchanges:

1. Commission Broker: The commission broker executes buying and selling on the floor of
the stock exchange.
2. Floor Broker: Floor brokers are not many. They execute orders for fellow members and
receive a share brokerage commission charged by a commission broker to his/her
constituent.

3. Tataniwala: He/she is a jobber or specialist in selected shares he/she ‘makes the market’
i.e. brings continuity to dealings. They specialize in stocks which are traded inactively.
4. Dealer in non-cleared securities: He/she deals in securities which are not on the active list.

5. Odd-lot Dealer: He/she specializes in buying and selling in amounts which are less than
present trading units. They buy and sell odd lots, make them up into marketable trading
units. These dealers receive commission. Their earnings come from the difference between
the process at which they buy and sell. The odd-lot dealer has become an important
operator since the growth of new issues. When the number of applicants for a new issue is
large, shares may be allotted in lots which are smaller than prescribed lots. The odd-lot
dealer makes profit on the large numbers of odd-lots by buying and selling at different
prices.

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