Securities Market and Capital Market: Characteristics of security market

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 Securities Market

Securities market is a component of the wider financial market where securities can be bought and sold on the basis of demand and supply.

Securities markets encompasses equity markets, bond markets and derivatives markets where prices can be determined and participants both professional and non professionals can meet.

Capital Market

Capital market means the share and stock markets of the country. It is a market for long term fund.

When banking system cannot totally meet up the need for funds to the market economy, capital market stands up to supplement it. Companies and the government can raise funds for long term investments via the capital market.

The capital market includes the stock market, the bond market, and the primary market.

Characteristics of a Good Security Market

The characteristics of a well-functioning securities market are:

Efficient Internally –  An efficient or good market is one in which the transaction cost is minimum i.e., the market should be internally efficient.

Efficient Externally – Markets react quickly to new news; existing prices reflect all available information, e.g. supply and demand.

Liquidity – Markets are liquid and as such, assets can be bought or sold easily. There are numerous buyers and sellers giving depth to the market.

Continuity – In the context of liquidity, prices do not change substantially from one transaction to another unless significant new news arises.

Marketability – In the context of liquidity, marketability is the ability to sell an asset quickly.

Timely and accurate information –  Investors will be able to get accurate and quick information necessary for the security transactions.

Securities Market of Bangladesh

Soon after independence, the country nationalises almost all industries as part of its ‘socialist’ economic policy.

Accordingly, the government postpones the activities of the Dhaka Stock Exchange (DSE) and limits the contribution of the private sector to the economy.

By the short period, the initiative turns into a disaster as the management of state-owned enterprises (SOEs) turns out to be extremely politicised and corrupted.

In addition, bureaucrats of the government with little or no prior professional experience in business are appointed to operate state-owned enterprises.

As a result, firms’ operating efficiency turns down results in a high volume of operating losses amounting to about 30% of annual project aid.

After realising the devastating scenario of SOEs in 1976, the Government of Bangladesh abandons the ‘socialist’ economic policy and focuses on market-based economy.

Hence, the BD government adopts privatisation policy to increase the role of the private sector in the economy. In this perspective, the activities of stock exchange resumed in 1976.

The securities (capital) market of Bangladesh is made of two stock exchanges, namely Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE).

There are 566 companies listed on the Dhaka Stock Exchanges as of 19th July 2016 (DSE, 2016b) and 306 are listed on the Chittagong Stock Exchange as of 25th October 2017.

Types or  Levels of Securities Markets

Securities markets can be split into below two levels.

Primary markets: Where new issues of bonds, preferred stock, or common stock are sold by government units, municipalities, or companies who want to acquire new capital.

Secondary markets: Where existing securities can be bought and sold.

Orders  in Securities Markets

What is Order (exchange)?

An order is an instruction to buy or sell on a trading venue such as a stock market, bond market, commodity market or financial derivative market.

These instructions can be simple or complicated, and can be sent to either a broker or directly to a trading venue via direct market access.

Different Types of Order

There are four different types of orders:

(1)  Market Order

(2) Limit Order

(3) Stop Order

(4) Stop Limit Order

Market Order

An investor makes a market order through a broker or brokerage service to buy or sell an investment immediately at the best available current price.

A market order is the default option and is likely to be executed because it does not contain restrictions on the price or the time frame in which the order can be executed.

A market order is also sometimes referred to as an unrestricted order.

For example, an investor enters an order to purchase 100 shares of a company XYZ Inc. at market price. Since the investor opts for whatever price XYZ shares are going for, his trade will be filled rather quickly – at, say, $87.50 per share.

Limit Order

Limit orders are designed to give investors more control over the buying and selling prices of their trades. Prior to placing a purchase order, a maximum acceptable purchase price amount must be selected, and minimum acceptable sales prices are indicated on sales orders.

For example, if the investor above is very concerned about buying XYZ shares for a lower price and he thinks that he can get XYZ shares for $86.99 instead, he will enter a limit order for this price. If at some point during the trading day, XYZ drops to this price or below, the investor’s order will be triggered and he will get 100 shares for $86.99 or less. However, at the end of trading day, if XYZ doesn’t go as low as the investor’s set limit, the order will be unfilled.

Stop Order

With a stop order, your trade will be executed only when the security you want to buy or sell reaches a particular price (the stop price). Once the stock has reached this price, a stop order essentially becomes a market order and is filled.

For instance, if you own shares of JC Penney (JCP), which currently trades at $5.60, and you place a stop order to sell it at $5.00, your order will only be filled if stock JCP drops below $5.00.

A stop-limit order is a conditional trade over a set time frame that combines the features of stop with those of a limit order and is used to mitigate risk. The stop-limit order will be executed at a specified price, or better, after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.

For example, assume that ABC Inc. is trading at $40 and an investor wants to buy the stock once it begins to show some serious upward momentum. The investor has put in a stop-limit order to buy with the stop price at $45 and the limit price at $46. If the price of ABC Inc. moves above $45 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $46, which is the limit price, the trade will be filled. If the stock gaps above $46, the order will not be filled.