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Securities market From Wikipedia, the free encyclopedia

Securities market is an economic institute within which take place sale and purchase transactions of securities between subjects of economy on the base of demand and supply. Also we can say that securities market is a system of interconnection between all participants (professional and nonprofessional) that provides effective conditions: to buy and sell securities, to attract new capital by means of issuance new security (securitization of debt), to transfer real asset into financial asset, to invest money for short or long term periods with the aim of deriving profit.Contents [hide] [edit] Functions of securities market

The common market functions of securities market: commercial function (to derive profit from operation on this market) Price determination (Demand and Supply balancing, the continuous process of prices movements guarantees to state correct price for each security (So, the market corrects mispriced securities) Informative function (market provides all participants with market information about participants and traded instruments) Regulation function (securities market creates the rules of trade, contention ( priorities determination) ) regulation,

Specific functions of the securities market Transfer of ownership (securities markets transfer existing stocks and bonds from owners who no longer desire to maintain their investments to buyers who wish to increase those specific investments. There is no net change in the number of securities in existence, for there is only a transfer of ownership. The role of securities market is to facilitate ( ) this transfer of ownership. This transfer of securities is extremely important, for securities holders know that a secondary market exists in which they may sell their securities holdings. The ease with which securities may be sold and converted into cash increases the willingness of people to hold stocks and bonds and thus increases the ability of firms to issue securities)

Borrowers in the new issue market may be raising capital for converting private capital into public capital. Companies. The process of selling new issues to investors is called underwriting. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. In a primary issue. though it can be found in the prospectus. such as loans from financial institutions. Primary markets creates long term instruments through which corporate entities borrow from capital market. This is typically done through a syndicate of securities dealers. governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. The new issue market does not include certain other sources of new long term external finance. this is known as "going public. .Insurance (hedging) of operations though securities market (options. ) [edit] Levels of securities market [edit] Primary market The primary market is that part of the capital markets that deals with the issue of new securities. Therefore it is also called the new issue market (NIM). Methods of issuing securities in the primary market are: Initial public offering. the securities are issued by the company directly to investors. futures. Features of primary markets are: This is the market for new long term equity capital. Dealers earn a commission that is built into the price of the security offering. The company receives the money and issues new security certificates to the investors. The primary market performs the crucial function of facilitating capital formation in the economy." The financial assets sold can only be redeemed by the original holder. The primary market is the market where the securities are sold for the first time. In the case of a new stock issue. this sale is an initial public offering (IPO).

liquid secondary market for the investors who own stocks that trade on those exchanges. bonds. which occurs via facilities constructed for the purpose of trading (i. bonds. Loans sometimes trade online using a Loan Exchange.Rights issue (for existing companies). over-the-counter trading in stock is carried out by market makers that make markets in OTCBB and Pink Sheets securities using inter-dealer quotation services such as Pink . [edit] Secondary Market The secondary market. With primary issuances of securities or financial instruments. In the U. such as futures exchanges or stock exchanges. or an alternative use for an existing product or asset where the customer base is the second market (for example. The major stock exchanges are the most visible example of liquid secondary markets . or the primary market. The secondary market for a variety of assets can vary from loans to stocks. commodities or derivatives directly between two parties. Most bonds and structured products trade over the counter. It is contrasted with exchange trading. also known as the aftermarket. The term "secondary market" is also used to refer to the market for any used goods or assets. Nasdaq and the American Stock Exchange provide a centralized. and futures are bought and sold.. options. and from illiquid to very liquid. corn has been traditionally used primarily for food production and feedstock. is the financial market where previously issued securities and financial instruments such as stock.in this case. [edit] Over-the-counter market Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks. investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement. exchanges). for stocks of publicly traded companies. from fragmented to centralized. investors can purchase from other investors in the secondary market. Stock exchange and over the counter markets. but a "second" or "third" market has developed for use in ethanol production).e. Preferential issue.. or by phoning the bond desk of one s broker-dealer. or directly from the federal government in the case of treasuries. Exchanges such as the New York Stock Exchange.S. After the initial issuance.

is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee). though exchange listed stocks can be traded OTC on the third market. Bill of Lading (a Bill of Lading is a document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods. They differ from IOUs in that they contain a specific promise to pay." The NYMEX has created a clearing mechanism for a slate of commonly traded OTC energy derivatives which allows counterparties of many bilateral OTC transactions to mutually agree to transfer the trade to ClearPort. [edit] Main financial instruments Bond. other OTC stocks. Promissory note. For derivatives. [edit] Promissory note A promissory note. It is mostly done via the computer or the telephone. OTC stocks are not usually listed nor traded on any stock exchanges. referred to as a note payable in accounting. Certificate of deposit. Stock. the exchange's clearing house. Forwards and swaps are prime examples of such contracts. It is usually from an investment bank to its clients directly. or commonly as just a "note". under specific terms. such as those stocks categorized as Pink Sheets securities. An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. thus eliminating credit and performance risk of the initial OTC transaction counterparts. while those stocks categorized as OTCQX have met alternative disclosure guidelines through Pink OTC Markets. either at a fixed or determinable future time or on demand of the payee. [edit] . have no reporting requirements. rather than simply acknowledging that a debt exists. Cheque a security contains requirement to make full payment to the bearer of cheque . This segment of the OTC market is occasionally referred to as the "Fourth Market. Although stocks quoted on the OTCBB must comply with United States Securities and Exchange Commission (SEC) reporting requirements. these agreements are usually governed by an International Swaps and Derivatives Association agreement." ).Quote (operated by Pink OTC Markets) and the OTC Bulletin Board (OTCBB).

[edit] Bill of lading A bill of lading (sometimes referred to as a BOL. They are different from savings accounts in that the CD has a specific.e. they are "money in the bank" (CDs are insured by the FDIC for banks or by the NCUA for credit unions). and sea. A thorough bill of lading involves the use of at least two different modes of transport from road. [edit] Bond Bond . exists. It is intended that the CD be held until maturity. fixed term (often three months. The standard short form bill of lading is evidence of the contract of carriage of goods and it serves a number of purposes: It is evidence that a valid contract of carriage. at which time the money may be withdrawn together with the accrued interest. the short form simply . and. The bond may provide for other property rights of its holder. and it may incorporate the full terms of the contract between the consignor and the carrier by reference (i. or a chartering contract. air. and credit unions. usually. The term derives from the verb "to lade" which means to load a cargo onto a ship or other form of transportation. a financial product commonly offered to consumers by banks. CDs are similar to savings accounts in that they are insured and thus virtually risk-free. where this is not contrary to legislation. six months. A bill of lading can be used as a traded object. rail. its nominal value and the interest fixed therein on this value or other property equivalent.or B/L) is a document issued by a carrier to a shipper.Certificate of deposit A certificate of deposit or CD is a time deposit. within the time period specified therein. a fixed interest rate. acknowledging that specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified. thrift institutions. or one to five years).an issued security establishing its holder's right to receive from the issuer of the bond.

Preferred stock may also be callable. [edit] Preferred stock Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. by means of capital growth. It is a receipt signed by the carrier confirming whether goods matching the contract description have been received in good condition (a bill will be described as clean if the goods have been received on board in apparent good condition and stowed ready for transport). like a cheque or other negotiable instrument. the common shareholders will not receive money until the creditors. meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). This matches everyday experience in that the contract a person might make with a commercial carrier like FedEx for mostly airway parcels. irrespectively of who the actual holder of the B/L.) With preferred shares investors are usually guaranteed a fixed dividend forever. which has variable dividends that are never guaranteed. and preferred shareholders are paid. common stock. i. This higher return comes at a cost since common stocks entail the most risk. (This may vary depending on the company. .refers to the main contract as an existing document. If a company goes bankrupt and liquidates. and owner of the goods. bondholders. Some people consider preferred stock to be more like debt than equity. however it binds the carrier to its terms. it governs all the legal aspects of physical carriage. and It is also a document of transfer. it may be endorsed affecting ownership of the goods actually being carried. [edit] Stocks (shares) [edit] Common shares Common shares represent ownership in a company and a claim (dividends) on a portion of profits.Over the long term. may be at a specific moment. This is different than common stock. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder (but still after debt holders). Investors get one vote per share to elect the board members. whereas the long form of a bill of lading (connaissement intégral) issued by the carrier sets out all the terms of the contract of carriage). being freely transferable but not a negotiable instrument in the legal sense. is separate from any contract for the sale of the goods to be carried. and. yields higher returns than almost every other investment. who oversee the major decisions made by management.e.

3)monies and securities received in the process of securities management. collation and correction of information on security deals and preparation of bookkeeping documents thereon) and in offsetting these obligations in deliveries of securities Depositary activity shall be deemed the rendering of services in the safekeeping of certificates of securities and/or recording and transfer of rights to securities . in his own name. and also under a power (letter) of attorney for the performance of such transactions in the absence of indication of the powers of agent or commission agent in the contract. Activity in the management of securities shall be deemed performance by a legal person or individual business person. during a stated period.legal persons. for a remuneration. and also citizens registered as business persons who conduct the following types of activity: Brokerage shall be deemed performance of civil-law transactions with securities as agent or commission agent acting under a contract of agency or commission. Clearing activity shall be deemed activity in determining mutual obligations (collection. Dealer activity shall be deemed performance of transactions in the purchase and sale of securities in one's own name and for one's own account through the public announcement of the prices of purchase and/or sale of certain securities. including credit organizations.[edit] Professional participants Professional participants in the securities market . in the interests of this person or of third parties designated by this person: 1)securities. of trust management of the following conveyed into his possession and belonging to another person. 2)monies intended for investment in securities. with an obligation of the purchase and/or sale of these securities at the prices announced by the person pursuing such activity.

the ignorant party lacks information while negotiating an agreed understanding of or contract to the transaction. or effectively retaliate for breaches of. Michael Spence. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. In adverse selection models. whereas in moral hazard the ignorant party lacks information about performance of the agreed-upon transaction or lacks the ability to retaliate for a breach of the agreement. fixing. An example of moral hazard is when people are more likely to behave . the free encyclopedia In economics and contract theory.Activity in the keeping of a register of owners of securities shall be deemed collection. and Joseph E. In 2001. usually due to lack of information about the particular individual's risk but also sometimes by force of law or other constraints. certain parts of an agreement whereas the other(s) cannot. An example of adverse selection is when people who are high risk are more likely to buy insurance. Most commonly. Information asymmetry From Wikipedia."[1]Contents [hide] [edit] Information asymmetry models Information asymmetry models assume that at least one party to a transaction has relevant information whereas the other(s) do not. information asymmetries are studied in the context of principal-agent problems. because the insurance company cannot effectively discriminate against them. storage and provision of data constituting a system of keeping the register of security owners Provision of services directly promoting conclusion of civil-law transactions with securities between participants in the securities market shall be deemed activity in the arrangement of trading on the securities market. information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Examples of this problem are adverse selection and moral hazard. Stiglitz "for their analyses of markets with asymmetric information. processing. Some asymmetric information models can also be used in situations where at least one party can enforce. the Nobel Prize in Economics was awarded to George Akerlof.

it is possible for people to signal their type. signaling and screening. which brought informational issues at the forefront of economic theory. Skill in learning is malleable. An employer is interested in hiring a new employee who is "skilled in learning. [edit] Adverse selection The classic paper on adverse selection is George Akerlof's "The Market for Lemons" from 1970. However. This idea was originally studied in the context of looking for a job. including diet. [edit] Screening . thus believably transferring information to the other party and resolving the asymmetry. finishing functions as a signal of their capacity for learning.recklessly after becoming insured. but only they know if they really are. or it may signal a willingness to comply with authority. [edit] Signaling Michael Spence originally proposed the idea of signaling. Spence proposes. and depends upon many factors. either because the insurer cannot observe this behavior or cannot effectively retaliate against it." Of course. He proposed that in a situation with information asymmetry. that going to college can function as a credible signal of an ability to learn. then by finishing college the skilled people signal their skill to prospective employers. Assuming that people who are skilled in learning can finish college more easily than people who are unskilled. for example. exercise. No matter how much or how little they may have learned in college. finishing college may merely function as a signal of their ability to pay for college. It discusses two primary solutions to this problem. it may signal the willingness of individuals to adhere to orthodox views. for example by failing to renew the insurance. and money. all prospective employees will claim to be "skilled at learning". This is an information asymmetry.

a substantial portion of research in the field of accounting can be framed in terms of information asymmetry. and life insurance transactions. the average value of the commodity tends to go down. In this way the underinformed party can induce the other party to reveal their information. [edit] Application of information asymmetry in research Since the seminal contributions of Akerlof. In particular. They can provide a menu of choices in such a way that the choice depends on the private information of the other party. or the price of used cars. or sales of old art pieces without prior professional assessment of their value. real estate agents. stock analysts. This situation was first described by Kenneth J. investors.Joseph E. Although information asymmetry has recently been noted to be on the decline with the rise of the internet. since accounting involves the transmission of enterprise's information from those who have it to those who need it for decision-making. . it is still heavily applied to human resource and personnel economics regarding incentive schemes when the employer cannot continually observe worker effort. Realtors. mortgage brokers and loan originators. unscrupulous sellers can "spoof" items (like replica goods such as watches) and defraud the buyer. or will not spend as much for a given item. Likewise. Because of information asymmetry. Spence. As a result. the pervasive effects of information asymmetry in markets have been documented and studied in numerous contexts. financial economists apply information asymmetry in studies of differentially informed financial market participants (insiders. many people not willing to risk getting ripped off will avoid certain types of purchases. Stiglitz pioneered the theory of screening. and Stiglitz. even for those of perfectly good quality.[2] George Akerlof in The Market for Lemons notices that. It is even possible for the market to decay to the point of nonexistence. in such a market. etc). Examples of situations where the buyer usually has better information than the seller include estate sales as specified in a last will and testament. stockbrokers. Arrow in an article on health care in 1963. Examples of situations where the seller usually has better information than the buyer are numerous but include used-car salespeople. which allows ignorant users to acquire hitherto unavailable information such as the costs of competing insurance policies.

and so on. This is sometimes summarized as "the bad driving out the good" in the market. It discusses information asymmetry. Michael Spence. .The Market for Lemons From Wikipedia. he/she will be willing to pay for it only the price of a car of known average quality. motivates the owners of moderately good cars not to sell. Akerlof. in turn. accordingly. owners of good cars will not place their cars on the used car market. It concludes that owners of good cars will not place their cars on the used car market. good used car will be unable to get a high enough price to make selling that car worthwhile. Akerlof's paper uses the market for used cars as an example of the problem of quality uncertainty. The withdrawal of good cars reduces the average quality of cars on the market.e. after a period of use by its first owner and its inevitable wear and tear. This. a "clunker". There are good used cars ("cherries") and defective used cars ("lemons"). which occurs when the seller knows more about a product than the buyer. the free encyclopedia "The Market for Lemons: Quality Uncertainty and the Market Mechanism" is a 1970 paper by the economist George Akerlof.Contents [hide] [edit] The Used Cars uncertainty problem Akerlof's paper uses the market for used cars as an example of the problem of quality uncertainty. the buyer of a car does not know beforehand whether it is a cherry or a lemon. causing buyers to revise downward their expectations for any given car. Because many important mechanical parts and other elements are hidden from view and not easily accessible for inspection. never-abused. normally as a consequence of several not-always-traceable variables such as the owner's driving style. quality and frequency of maintenance and accident history. A used car is one in which ownership is transferred from one person to another. i. So the buyer's best guess for a given car is that the car is of average quality. The result is that a market in which there is asymmetrical information with respect to quality shows characteristics similar to those described by Gresham's Law: the bad drives out the good (although Gresham's Law applies to a different situation). This means that the owner of a carefully maintained. Therefore. and Joseph Stiglitz jointly received the Nobel Memorial Prize in Economic Sciences in 2001 for their research related to asymmetric information. A lemon is a slang term in America for a bad car.

buyers will only be willing to pay (3/2)(p/2) = . the average quality of the cars offered for sale at p will be worth only p/2. Now.e. where qavg is the average quality of all the cars. and takes the quality of the goods to be uncertain. where. In this model. The market for used cars collapses when there is asymmetric information. it is those most likely to need insurance compensation who tend most to buy insurance. q to index the quality of used cars. takes this incentive into consideration. Based on this estimation. There are a large number of buyers looking for cars who are prepared to pay their reservation price of for a car that is of quality q. assume that the equilibrium price in the market is some price. If quality were observable. however. and the cars would be sold and everyone would be perfectly happy. Therefore we can conclude that no cars will be sold at p. as quality is undistinguishable beforehand by the buyer (due to the asymmetry of information)."Lemon market" effects have also been noted in other markets. incentives exist for the seller to pass off low-quality goods as higher-quality ones. then it seems reasonable for them to estimate the quality of a car offered to market using the average quality of all cars. p. quality is uniformly distributed over the interval from 0 to this p. [edit] Asymmetric information The paper by Akerlof describes how the interaction between quality heterogeneity and asymmetric information can lead to the disappearance of a market where guarantees are indefinite. Only the average quality of the goods will be considered. unless those least likely to need insurance (i. Since again. At this price. There are also parallels in the insurance market. There are also a large number of sellers who are prepared to sell a car of quality q for the price q. those least likely to get in accidents) are forced to buy insurance.1]. where p > 0.. The buyer. it is shown that no cars will be sold at any positive price at all. where q is uniformly distributed over the interval [0. the willingness to pay for any given car will therefore be . all the owners of cars with quality less than p will want to offer their cars for sale. This mechanism is repeated until a no-trade equilibrium is reached. The average quality of a used car which could be supplied to the market is therefore 1/2. [edit] Statistical abstract of the problem Suppose we can use some number. Because p is any arbitrary positive price. . such as used computers[citation needed] . If the quality of cars is not observable by the buyers. the price of used cars would therefore be somewhere between q and . We know however that for an expected quality worth p/2. which in turn will have the side effect that goods that are above average in terms of quality will be driven out of the market.

not all players in a given market will follow the same rules or have the same aptitude of assessing quality. markets may fail to exist altogether in certain situations involving quality uncertainty. because the quality of used vehicles sold in these states is not significantly better than the vehicles in neighboring states without such consumer protection legislation. on the whole.[1] Both the American Economic Review and the Review of Economic Studies rejected the paper for "triviality". he can send the lobster back to the kitchen and refuse to pay for it. and the trend will be to weed out products with prices in excess of their quality.g. Hoffer and Michael D..As a consequence of the mechanism described in this paper.[dubious discuss] that is to say. This is part of the basis for the idiom. In this case. arguing that if this paper was correct. Pratt state that the economic literature is divided on whether a lemons market actually exists in used vehicles. appears to be of reasonable quality and have reasonable guarantees of certainty. a large variety of better quality and higher priced restaurants are supported. and quality is almost always assessed in fine establishments by smell and taste before they pay. the sellers will get the highest price paid." The authors research supports the hypothesis that known defects provisions. used by US states (e. the death of formal credit markets in developing countries. Wisconsin) to regulate used car sales have been ineffectual. then no goods could be traded. Thus. [edit] Critical reception George E. However. if a customer in a fine establishment orders a lobster and the meat is not fresh. However. Examples given in Akerlof's paper include the market for used cars. This is likely the basis for the idiom that an informed consumer is a better consumer. Individual consumers know best what they prefer to eat. a definition of 'highest quality' for food eludes providers. There is no reciprocal danger of a market for a good product collapsing in this manner when the asymmetry is in favour of the buyer. regular market forces of supply and demand will prevail. when the buyers can assess more accurately the quality of the products than the sellers. buyer beware. Only on the 4th attempt did the paper get . So there will always be a distinct advantage for some vendors to offer low-quality goods to the less-informed segment of a market that. while the reviewers for Journal of Political Economy rejected it as incorrect. That is. An example of this might be the subjective quality of fine food and wine. and the difficulties that the elderly encounter in buying health insurance.

in which no buyers can accurately assess the value of a product through examination before sale is made and all sellers can more accurately assess the value of a product prior to sale An incentive exists for the seller to pass off a low quality product as a higher quality one Sellers have no credible disclosure technology (sellers with a great car have no way to disclose this credibly to buyers) Either a continuum of seller qualities exists or the average seller type is sufficiently low (buyers are sufficiently pessimistic about the seller's quality) Deficiency of effective public quality assurances (by reputation or regulation and/or of effective guarantees/warranties) [edit] Impact on markets The article draws some conclusions about the cost of dishonesty in markets in general: The cost of dishonesty. the paper is one of the most-cited papers in modern economic theory (more than 8. [edit] Laws in the United States .[2] Today. from industrial organisation and public finance to macroeconomics and contract theory. therefore. [edit] Criteria A lemon market will be produced by the following: Asymmetry of information. lies not only in the amount by which the purchaser is cheated.530 citations in academic papers as of May 2011).published in Quarterly Journal of Economics. the cost also must include the loss incurred from driving legitimate business out of existence.[3] and has profoundly influenced economic thinking in virtually every field of economics.

value or safety. observing that some used-car markets haven't broken down even without lemon legislation and that the lemon problem creates entrepreneurial opportunities for alternative marketplaces or customers' knowledgeable friends. and not as a literal statement concerning the actual business of car sales or any real-life individuals and companies engaged in such a business. but each state has different names for the laws and acts. In California and federal law. "Lemon law" is the common nickname for these laws.[4] In any case." The defect must substantially hinder the vehicle's use.Five years after Akerlof's paper was published. Anderson oppose the regulatory approach proposed by the authors of the paper. as do most state lemon laws. Libertarians like William L. . These state laws provide remedies to consumers for automobiles that repeatedly fail to meet certain standards of quality and performance. however. [edit] Criticism Criticism for this theory stems from the fact that it ignores the fact that consumers themselves can seek ways to assure the quality of a car and that a used-car salesman may work to maintain his reputation rather than pass off a "lemon". The United States enacted a federal "lemon law" (the Magnuson-Moss Warranty Act) that protects citizens of all states. would not apply to private individual sellers who do not intend to sell another car in the near future. which may also cover more than just automobiles. The federal "lemon law" also provides the warrantor may be obligated to pay your attorney fees if you prevail in a lemon law suit. There are also state laws regarding "lemons" which vary by state and may not necessarily cover used or leased vehicles. "Lemon Laws" cover anything mechanical. the car may be deemed to be "a lemon. the "used car" scenario is clearly intended as an allegory. Purchasers who knowingly purchase a car in "as is" condition accept the defects and void their rights under the "lemon law". The rights afforded to consumers by "lemon laws" may exceed the warranties expressed in purchase contracts. The issue of reputation. If a car has to be repaired for the same defect four or more times and the problem is still occurring. meant to clearly illustrate an idea.