Methods in Stock Markets

24/11/2023 0 By indiafreenotes

The Stock market operates through various methods and mechanisms that facilitate the buying and selling of securities. These methods ensure orderly and efficient trading while providing transparency and fairness.

Auction Method:

    • Open Auction: Most stock exchanges operate through open auction systems where buyers and sellers place orders, and the prices are determined by the interaction of these orders.
    • Continuous Auction: Trading occurs continuously throughout the trading day, with prices adjusting in response to new buy and sell orders.

Order Types:

    • Market Orders: An instruction to buy or sell a security immediately at the best available market price.
    • Limit Orders: An order to buy or sell a security at a specific price or better. It is executed only at the specified price or a better one.

Electronic Trading:

    • Algorithmic Trading: The use of computer algorithms to execute a large number of orders at high speeds, leveraging mathematical models for trading strategies.
    • High-Frequency Trading (HFT): Involves executing a large number of orders at extremely high speeds, taking advantage of small price discrepancies.

Clearing and Settlement:

    • T+2 Settlement: The standard settlement cycle where trades are settled two business days after the trade date.
    • Central Counterparty (CCP): An entity that interposes itself between the buyer and seller, becoming the counterparty to both.

Regulatory Mechanisms:

    • Circuit Breakers: Automatic halts in trading triggered by significant market movements to prevent excessive volatility.
    • Margin Trading: Investors can borrow funds to buy securities, and margin requirements set by regulators control the extent of borrowing.

Block Trading:

Large-sized trades that occur outside the normal exchange trading platform, typically involving a substantial number of shares.

Dividend Reinvestment Plans (DRIPs):

Programs that allow investors to reinvest their cash dividends into additional shares of the issuing company’s stock.

Rights Issues and Bonus Issues:

    • Rights Issue: Existing shareholders are given the right to purchase additional shares at a discounted price.
    • Bonus Issue: Additional shares are issued to existing shareholders without any additional cost.

Buyback of Shares:

Companies repurchase their own shares from the market, reducing the number of outstanding shares.

Short Selling:

Investors sell borrowed securities with the expectation that the prices will decline, allowing them to buy back the shares at a lower price.

Special Trading Segments:

    • Derivatives Market: Trading in financial instruments derived from underlying assets, such as futures and options.
    • Currency Trading: Trading in foreign exchange markets, involving the buying and selling of currencies.

Pre-Opening Session:

A brief period before the regular trading session begins, allowing traders to react to overnight news and adjust their positions.

After-Hours Trading:

Trading that occurs outside of regular market hours, allowing investors to react to news events or earnings announcements.

Specialized Trading Platforms:

Electronic trading systems that operate parallel to traditional stock exchanges, providing alternative avenues for trading.

Market Surveillance:

Continuous monitoring of trading activities to detect and prevent market manipulation, insider trading, and other illicit activities.