Showing posts with label Broker-dealer. Show all posts
Showing posts with label Broker-dealer. Show all posts
Thursday, 22 July 2010
Brokers / Dealers
A broker/dealer firm operates in a dual capacity in the securities marketplace. It acts as a broker (agent) advising and representing clients in the market. The broker/dealer also acts as a principal, making markets, trading against its own clients and other market participants, as well as trading for its own account.
Agents
Agents act as brokers/intermediaries by buying and selling securities on behalf of their clients. As explained earlier, agents can act in various capacities. Agents make money by charging a commission for executing a client order. They are not permitted to charge a mark-up on prices quoted by third parties, such as market makers and traders, in the market. Commission charges may vary depending on the client. For instance, lower charges may be applied to institutional trades, as the average size of such trades is generally much larger than that of retail investor trades. Agents may also provide custodial services to their clients for a fee.
Wednesday, 21 July 2010
Types of orders
There are a number of different types of order that clients may place with brokers.
Market Orders (MKT)
Market orders are orders to buy or sell a contract at the current best price, whatever that price may be. In an active market, market orders will always get filled, but not necessarily at the exact price that the trader intended. For example, a trader might place a market order when the best price is 1.2954, but other orders might get filled first, and the trader's order might get filled at 1.2956 instead. Market orders are used when you definitely want your order to be processed, and are willing to risk getting a slightly different price.
Limit Orders (LMT)
Limit orders are orders to buy or sell a contract at a specific or better price. Limit orders may or may not get filled depending upon how the market is moving, but if they do get filled it will always be at the chosen price, or at a better price if there is one available. Here not time but the price at which trade is done is important.
In buy limit order one can buy at a price limit or lower i.e. in buy limit order one decides maximum price that can be paid to buy the price.
In sell limit order one can sell at limit price or higher, so here one decides the minimum price below which one cannot sell .
Limit orders are best when money at which is transacted is more important than time of transaction.
For example, if a trader placed a limit order with a price of 1.2954, the order would only get filled at 1.2954 or better, if it got filled at all. Limit orders are used when you want to make sure that you get a suitable price, and are willing to risk not being filled at all.
The disadvantage of a limit order is that it may never be executed because the share price may quickly surpass the limit price before the order can be filled.
Stop Orders (STP)
Stop orders are similar to market orders, in that they are orders to buy or sell a contract at the best available price, but they are only processed if the market reaches a specific price called stop price.
It is of 2 types - buy and sell.
Buy stop order - In case of buy stop order the investor protects a profit for short sale (Short sale is the sale of a stock not owned in the anticipation that the price of the stock will fail.) or in hope of making a gain, thinking that the stock is making the momentum.
Sell stop order is used to avoid further losses or to lock-in the profit that exists if the price of the share continues to fall.
For example, you have bought a stock at USD 100 and want to sell it as soon as it hits USD 105. So sell stop orders is used because a stop order becomes a market order once the specified price is hit. However, there is no guarantee that you will get out at the stop price (USD 105). You might get out above or below this price since you have no way of knowing which way the price will move once the stop price is hit.
Stop orders are processed as market orders, so if the stop (or trigger) price is reached, the order will always get filled, but not necessarily at the price that the trader intended. Stop orders will trigger if the market trades at or past the stop price, so for a buy order, the stop price must be above the current price, and for a sell order, the stop price must be below the current price.
Advantage of stop orders that it removes the need that the investors keep monitoring there stocks. But it has drawback that stop order may be executed even when there is short-term fluctuation.
Stop Limit Orders (STPLMT)
Stop limit orders are a combination of stop orders and limit orders. Like stop orders, they are only processed if the market reaches a specific price, but they are then processed as limit orders, so they will only get filled at the chosen price, or a better price if there is one available. For example, if the current price is 1.2567, a trader might place a buy stop limit order with a price of 1.2572. If the market trades at 1.2572 or above, the stop limit order will be processed as a limit order. If the market continues to trade at 1.2572, the limit order will get filled at 1.2572 or at a better price if there is one available. Stop limit orders may or may not get filled depending upon whether or not the market reaches the chosen price, and then depending upon how the market moves. Stop limit orders will trigger if the market trades at or past the stop price, so for a buy order, the stop price must be above the current price, and for a sell order, the stop price must be below the current price.
Market if Touched Orders (MIT)
Market if touched orders are identical to stop orders, except that they are used when the market price has already traded past the stop price, and the trader only wants the order to be processed if the market price comes back to the stop price. For example, if the market price is 1.3010, and the trader places a buy market if touched order with a price of 1.3001, the order will only be processed if the market trades at or below 1.3001. If the order is processed, it will be processed as a market order, and will get filled at the current best price. Market if touched orders will trigger the opposite way than a stop order, so for a buy order, the trigger price must be below the current price, and for a sell order, the trigger price must be above the current price.
Limit if Touched Orders (LIT)
Limit if touched orders are identical to stop limit orders, except that they are used when the market price has already traded past the stop price, and the trader only wants the order to be processed if the market price comes back to the stop price. For example, if the market price is 1.3010, and the trader places a buy market if touched order with a price of 1.3001, the order will only be processed if the market trades at or below 1.3001. If the order is processed, it will be processed as a limit order. If the market continues to trade at 1.3001, the limit order will get filled at 1.3001 or at a better price is there is one available. Limit if touched orders will trigger the opposite way than a stop limit order, so for a buy order, the trigger price must be below the current price, and for a sell order, the trigger price must be above the current price.
All or None (AON)
Time related orders
Day order
Day orders can only be executed on the day the order is places (unless and until specified)
Good till cancelled (GTC) or Open orders
In this some limit price is set, which remains either till the order is executed or it gets cancelled.
Fill or Kill (FOK)
If they are not immediately executed, they are automatically cancelled.
- Market order
- Limit order
- Stop order
- Stop limit orders
- Other orders
Market Orders (MKT)
Market orders are orders to buy or sell a contract at the current best price, whatever that price may be. In an active market, market orders will always get filled, but not necessarily at the exact price that the trader intended. For example, a trader might place a market order when the best price is 1.2954, but other orders might get filled first, and the trader's order might get filled at 1.2956 instead. Market orders are used when you definitely want your order to be processed, and are willing to risk getting a slightly different price.
Limit Orders (LMT)
Limit orders are orders to buy or sell a contract at a specific or better price. Limit orders may or may not get filled depending upon how the market is moving, but if they do get filled it will always be at the chosen price, or at a better price if there is one available. Here not time but the price at which trade is done is important.
In buy limit order one can buy at a price limit or lower i.e. in buy limit order one decides maximum price that can be paid to buy the price.
In sell limit order one can sell at limit price or higher, so here one decides the minimum price below which one cannot sell .
Limit orders are best when money at which is transacted is more important than time of transaction.
For example, if a trader placed a limit order with a price of 1.2954, the order would only get filled at 1.2954 or better, if it got filled at all. Limit orders are used when you want to make sure that you get a suitable price, and are willing to risk not being filled at all.
The disadvantage of a limit order is that it may never be executed because the share price may quickly surpass the limit price before the order can be filled.
Stop Orders (STP)
Stop orders are similar to market orders, in that they are orders to buy or sell a contract at the best available price, but they are only processed if the market reaches a specific price called stop price.
It is of 2 types - buy and sell.
Buy stop order - In case of buy stop order the investor protects a profit for short sale (Short sale is the sale of a stock not owned in the anticipation that the price of the stock will fail.) or in hope of making a gain, thinking that the stock is making the momentum.
Sell stop order is used to avoid further losses or to lock-in the profit that exists if the price of the share continues to fall.
For example, you have bought a stock at USD 100 and want to sell it as soon as it hits USD 105. So sell stop orders is used because a stop order becomes a market order once the specified price is hit. However, there is no guarantee that you will get out at the stop price (USD 105). You might get out above or below this price since you have no way of knowing which way the price will move once the stop price is hit.
Stop orders are processed as market orders, so if the stop (or trigger) price is reached, the order will always get filled, but not necessarily at the price that the trader intended. Stop orders will trigger if the market trades at or past the stop price, so for a buy order, the stop price must be above the current price, and for a sell order, the stop price must be below the current price.
Advantage of stop orders that it removes the need that the investors keep monitoring there stocks. But it has drawback that stop order may be executed even when there is short-term fluctuation.
Stop Limit Orders (STPLMT)
Stop limit orders are a combination of stop orders and limit orders. Like stop orders, they are only processed if the market reaches a specific price, but they are then processed as limit orders, so they will only get filled at the chosen price, or a better price if there is one available. For example, if the current price is 1.2567, a trader might place a buy stop limit order with a price of 1.2572. If the market trades at 1.2572 or above, the stop limit order will be processed as a limit order. If the market continues to trade at 1.2572, the limit order will get filled at 1.2572 or at a better price if there is one available. Stop limit orders may or may not get filled depending upon whether or not the market reaches the chosen price, and then depending upon how the market moves. Stop limit orders will trigger if the market trades at or past the stop price, so for a buy order, the stop price must be above the current price, and for a sell order, the stop price must be below the current price.
Market if Touched Orders (MIT)
Market if touched orders are identical to stop orders, except that they are used when the market price has already traded past the stop price, and the trader only wants the order to be processed if the market price comes back to the stop price. For example, if the market price is 1.3010, and the trader places a buy market if touched order with a price of 1.3001, the order will only be processed if the market trades at or below 1.3001. If the order is processed, it will be processed as a market order, and will get filled at the current best price. Market if touched orders will trigger the opposite way than a stop order, so for a buy order, the trigger price must be below the current price, and for a sell order, the trigger price must be above the current price.
Limit if Touched Orders (LIT)
Limit if touched orders are identical to stop limit orders, except that they are used when the market price has already traded past the stop price, and the trader only wants the order to be processed if the market price comes back to the stop price. For example, if the market price is 1.3010, and the trader places a buy market if touched order with a price of 1.3001, the order will only be processed if the market trades at or below 1.3001. If the order is processed, it will be processed as a limit order. If the market continues to trade at 1.3001, the limit order will get filled at 1.3001 or at a better price is there is one available. Limit if touched orders will trigger the opposite way than a stop limit order, so for a buy order, the trigger price must be below the current price, and for a sell order, the trigger price must be above the current price.
All or None (AON)
Time related orders
Day order
Day orders can only be executed on the day the order is places (unless and until specified)
Good till cancelled (GTC) or Open orders
In this some limit price is set, which remains either till the order is executed or it gets cancelled.
Fill or Kill (FOK)
If they are not immediately executed, they are automatically cancelled.
Role of brokers
Brokers are professionals who play an important role in mediating between a lender and a borrower. Brokers collect personal information about the client for the lender including employment and medical history. They also provide the clients' financial and credit information to the lender. However the role of broker can be divided as following:
1. Execution only - Here broker simply obeys what client says without giving any advice.
2. Advisory - Here broker gives advise to client that whether he should buy or sell and at what time......but it is the client who makes the final decision
3. Discretionary - Here broker takes decision as well, taking into account what client wants.
1. Execution only - Here broker simply obeys what client says without giving any advice.
2. Advisory - Here broker gives advise to client that whether he should buy or sell and at what time......but it is the client who makes the final decision
3. Discretionary - Here broker takes decision as well, taking into account what client wants.
Types of Stock Brokers
Full Service Broker:
Charges the highest fees, usually has an in-house research team who researches and recommends stocks to buy. Sometimes the stock recommendations are those their company specializes in. This information is usually made public by the company. In a full service firm you are given your own personal broker who receives a commission for selling you the investment, but on the other hand they can possess valuable knowledge you do not have access to.
Discount Broker:
Gives you a discount in exchange for doing your own research. You are usually given a list of recommended stocks to research.
Online Broker:
Is is the newest form of broker. Their service is run online. You are given research, charts and investment news to research your own investments. Recommendations of stocks to research are sometimes given. They are usually the cheapest way to purchase investments, but you must know investment basics before you can use these services.
Saturday, 17 July 2010
The Secondary Market of bonds
The secondary market is the market for bonds that have already been issued on the primary market. On the secondary market, investors trade bonds with other investors through financial professionals. The investors who sell the bonds receive the proceeds, minus fees or commission payable to banks/brokers that facilitate the transaction.
Brokers and banks may purchase large numbers of bonds in the primary market and then sell them to investors in the secondary market. A bond may change hands a number of times on the secondary market before it reaches maturity.
The over-the-counter (OTC) market is the most common method of trading bonds on the secondary market. OTC trading refers to the buying and selling of bonds outside of an organized exchange. The market is made up of banks and brokerages that buy and sell bonds over the phone or electronically.
Many bonds are listed on a stock exchange, even though most trading is carried out on the OTC market. Stock exchanges are more transparent than OTC markets because prices and trading volumes are easily observable in exchange-traded markets. Despite this, exchange-traded volumes are still negligible compared to volumes on the OTC market.
The secondary market is the market for bonds that have already been issued on the primary market. The secondary market gives a price to bonds so that they can be sold before maturity.
On the secondary market, investors trade bonds with other investors through financial professionals. The original bond issuers normally play no part in the transaction at this stage. The investors who sell the bonds get the proceeds, minus fees or commission payable to the financial professionals who facilitate the transaction.
People Involved
It involves following people:
Trading Systems
The availability of automated trading systems and securities information systems has greatly enhanced bond trading. It accelerates trading and increases transparency for all market participants. In the US alone, bonds can be traded on over 80 trading systems.
These are the following:
Settlement and Taxation
Settlement
On the secondary market, settlement of trade usually occurs through domestic or international electronic clearing systems, such as Euroclear. Typically, settlement takes three business days (T+3), though it is sometimes shorter.
Taxation
Many countries charge a withholding tax on interest income and capital gains tax on capital gains from bonds.
Where a bilateral tax treaty exists between the issuer's country and the investor's country, the level of tax charged will be limited to the treaty amount. More and more countries are exempting non-residents from such taxes.
Brokers and banks may purchase large numbers of bonds in the primary market and then sell them to investors in the secondary market. A bond may change hands a number of times on the secondary market before it reaches maturity.
The over-the-counter (OTC) market is the most common method of trading bonds on the secondary market. OTC trading refers to the buying and selling of bonds outside of an organized exchange. The market is made up of banks and brokerages that buy and sell bonds over the phone or electronically.
Many bonds are listed on a stock exchange, even though most trading is carried out on the OTC market. Stock exchanges are more transparent than OTC markets because prices and trading volumes are easily observable in exchange-traded markets. Despite this, exchange-traded volumes are still negligible compared to volumes on the OTC market.
The secondary market is the market for bonds that have already been issued on the primary market. The secondary market gives a price to bonds so that they can be sold before maturity.
On the secondary market, investors trade bonds with other investors through financial professionals. The original bond issuers normally play no part in the transaction at this stage. The investors who sell the bonds get the proceeds, minus fees or commission payable to the financial professionals who facilitate the transaction.
People Involved
It involves following people:
- Broker
- Dealers
- Market Makers
- Inter-dealer broker
- Broker-dealer
- OTC - most common way
- ETD
Trading Systems
The availability of automated trading systems and securities information systems has greatly enhanced bond trading. It accelerates trading and increases transparency for all market participants. In the US alone, bonds can be traded on over 80 trading systems.
These are the following:
- Tradeweb
- E-speed
- Eurex bonds
- NYSE bonds
Settlement and Taxation
Settlement
On the secondary market, settlement of trade usually occurs through domestic or international electronic clearing systems, such as Euroclear. Typically, settlement takes three business days (T+3), though it is sometimes shorter.
Taxation
Many countries charge a withholding tax on interest income and capital gains tax on capital gains from bonds.
Where a bilateral tax treaty exists between the issuer's country and the investor's country, the level of tax charged will be limited to the treaty amount. More and more countries are exempting non-residents from such taxes.
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