Nature of Securities Markets. The prime objective of a firm is to achieve the highest value for the shareholders. The firm’s management should examine sufficiently the process by which a firm’s market value is determined, in particular, the important role of financial markets in the process. The determination of share price is a combination of the firm’s actions and reactions in the capital markets under the securities markets. Hence the securities markets make the flow of funds through the financial system. The borrowers of funds seek to augment their current income in order to acquire assets, and their refinancing to do so. Lenders have excess funds on which they wish to earn a return. The role of the securities markets is to facilitate the transfer of funds in the quickest and efficient manner. Capital markets are often referred to as the markets for the long term and medium-term funds.
Nature of Securities Markets
Capital market thus can be broadly classified into securities markets and non-securities markets.
The securities market has, in turn, two segments;
- The market for the primary issue, where the initial transactions between the users of funds and the suppliers of funds take place and
- The markets wherein secondary trading of issued securities take place in the secondary market.
No member of the stock exchange, in this respect, is supposed to violate the provisions of the Securities and Exchange Commission by manipulation of the securities prices.
Probably the most essential function performed by the exchange is the creation of continuous market- the opportunity to buy or sell securities immediately at a price that varies a little from the previous selling price. Thus, a continuous market allows investors to be liquid. That is, they are not obligated to hold their securities until maturity, or if they have common stocks indefinitely. An exchange also helps to fix the prices. Buy and sell order (or demand or supply) determine the prices. The exchange brings together buyers and sellers from all over the nation and even from foreign countries.
The stock exchange also provides a service to the industry by directly aiding new financing. The ease with which the investors can trade issues makes them more willing to invest in new issues. One way in which the securities market may be classified is by the types of securities bought and sold there. The broadest classification is based upon whether the securities are new issues or are already outstanding and owned by investors. New issues are made available in the primary markets; securities that are already outstanding and owned by investors are usually bought and sold through the secondary market. Another classification is by maturity; securities with maturity of one year or less are normally traded in the money market; those with maturities of more than one year are bought and sold in the capital market. However, highly liquid debt securities that have short terms until they mature and involve little or no risk of default are call money market securities.
All money market securities are debts that mature within 270 days or less. Money market securities are frequently issued instead of long-term debt securities in order to avoid administrative costs. Money market securities pay continuously fluctuating rates of interest that exceed the rate of inflation only slightly.
Investors also benefit from market mechanisms. They would hesitant to acquire the securities that are not readily marketable and such reluctance would reduce the total quantity of funds available to the finance industry and government. Those who own securities must be assured of a fast, fair, orderly and open system of purchase and sale at known prices.
The classification of the market we are most interested in is the one that differentiates between old and new securities- the primary and secondary markets. It Is obvious found that the investors who bought the stock at the offering price enjoyed a profit. In recent years the secondary markets have been further fragmented, creating ‘third’ and ‘fourth’ markets- where the third market represents over-the-counter trading of shares which are listed on an organized exchange and the fourth market represents direct trading of a huge number of shares between two investors viz., large institutional investors without intermediary.
Once the investors have purchased the new issues, they change hands in the secondary markets: the organized exchanges and over-the-counter (OTC) market.
Organized exchanges are physical market places where the agents of buyers and the sellers operate through the auction process.
Unlike the organized exchange, the over-the-counter market has no central location where the securities are traded. Being traded over-the-counter market implies that the trade takes place by telephone or electronic device and that dealers stand ready to buy or sell specific securities for their own accounts. They will buy at a bid price and sell at an asked price that reflects the competitive market conditions. The organized exchange being a self-policy organization of dealers requires at least two market makers (dealers) for each security, but often there are five or ten or even twenty for government securities.
So, the multiple dealer function in the OTC market is an attractive feature for many countries in comparison to the single specialist arrangement on the organized exchange. In an organized exchange the majority of the securities consist of equities, in terms of both volume and value. The opposite dimension of the market is for debt securities. It is safe to say that most long-term bond trading takes place in the OTC market, while all the trading in the short-term government securities takes place in the OTC market. However, debt securities can be categorized by the issuers of securities. Corporate bonds, the most popular debt securities, are traded both on the exchange and over-the-counter, although most of the trading takes place OTC.