There are two different settings in which securities transactions occur. The first, the seller of securities trying to sell to investors to try and raise capital for their company. The second setting is a buy-sale transaction that happens when investors have already purchased securities and want to trade them. Regardless of the setting in which investors buy the securities, there is certain information that they need to value the securities. Some of these pieces of information are:
- Financial rights of the securities that are being transacted
- Financial performance of the issuer
- Prospect’s and management of the issuer
- Competitive information
- Trends in the economy, etc.
Issuer Transactions
Those who sell their securities to raise capital for their company, Primary Market, try to sell their securities in public markets or in negotiated, private placements. To make a public offering (primary distribution) one must be trying to raise capital from a bigger group of investors. If you are attempting to obtain capital from the public for the first time, then it is an initial public offering (IPO).
Trading Transactions
After the securities have been bought by the investor,and the investor wishes to trade them, they enter the Secondary Market. There is no longer capital being raised for the issuer if the investor tries to trade their securities in the Secondary Market. The securities are merely liquidated or partially liquidated for the investor, and a different investor now owns the securities for which they traded. These investor to investor transactions can happen in privately negotiated transactions or in public trading markets, like through a stock exchange or a securities firm’s computerized trading. The liquidity that the secondary market provides to the investor also enlivens primary markets. Ninety-nine percent (99%) of securities transactions occurs in the Secondary Market.
Markets within the Secondary Market
Within the Secondary Market there are two principle markets for trading securities in the United States.The first market is the exchange markets, where buy and sell orders all come together at a centralized location, and where there are “specialists” to pair buyers and sellers and to manage a “book” of orders. The second market for trading securities is the over-the-counter (OTC) market. This market is between securities firms that can obtain information about securities that are being sold by other firms. They can get this access to the bidding and selling information through their computer terminals and price sheets. NASDAQ is the most well-known of these OTC markets. A more private and less expensive route than exchanges and OTC markets is electronic communication networks (ECNs). This eliminates and middle man between investors and allows them to directly trade with each other.
