Financial Institutions and Markets

Case Study on Trading in Securities

Submitted by,
Group No. - 9
Shrividya C – 17037
Vinod Kumar N – 17044
Lalkrishnesh N S – 17066
Athul Kashyap T – 17104
Bhavana M P - 17106
We would prefer to buy or sell equity shares and bonds in stock exchange. Because A stock
exchange has the benefit of facilitating liquidity, providing transparency, and maintaining the
current market price. Over-the-counter (OTC) or off-exchange trading is done directly
between two parties, without the supervision of an exchange. It is contrasted with exchange
trading, which occurs via exchanges. In an OTC trade, the price is not necessarily published
for the public.

Trading through stock exchange.

A stock exchange, is a facility where stock brokers and traders can buy and sell securities,
such as shares of stock and bonds and other financial instruments. Stock exchanges may also
provide for facilities the issue and redemption of such securities and instruments and capital
events including the payment of income and dividends. Securities traded on a stock exchange
include stock issued by listed companies, derivatives and bonds. Stock exchanges often
function as continuous auction markets with buyers and sellers consummating transactions at
a central location such as the floor of the exchange.

Trading at both the exchanges takes place through an open electronic limit order book, in
which order matching is done by the trading computer. There are no market makers or
specialists and the entire process is order-driven, which means that market orders placed by
investors are automatically matched with the best limit orders. As a result, buyers and sellers
remain anonymous. The advantage of an order driven market is that it brings more
transparency, by displaying all buy and sell orders in the trading system. However, in the
absence of market makers, there is no guarantee that orders will be executed.

Treading through OTC Markets

A decentralized market, without a central physical location, where market participants trade
with one another through various communication modes such as the telephone, email, and
proprietary electronic trading systems. An over-the-counter (OTC) market and an exchange
market are the two basic ways of organizing financial markets. In an OTC market, dealers act
as market-makers by quoting prices at which they will buy and sell a security, currency, or
other financial products. A trade can be executed between two participants in an OTC market
without others being aware of the price at which the transaction was completed. In general,
OTC markets are typically less transparent than exchanges and are also subject to fewer
regulations.
Difference between Stock exchange and OTC Market

1. Exchange plays a vital role of a regulatory body in stock market where as in OTC market
there is no existence of exchange (NSE & BSE).

2. There are chances of false contracts in OTC market but in stock market there are strict
restrictions imposed on traders and investors because of which no such thing can happen.

3. Trading is done with a network of dealers in OTC market. No license is required here. But
in stock market trading on only registered companies on exchange as well as which has
fulfilled all the requirements stated by SEBI(Security Exchange Board Of India) can be done.

4. More risk is involved in OTC market because it is less transparent then stock market.

Advantage of trading on stock exchange

 Proper regulation body is there

 Shares in D-mat form
 It has the benefit of facilitating liquidity, providing transparency, and maintaining the
current market price

Disadvantage of trading on stock exchange

 Only Brokers can Buy or sell the shares

 There is no guarantee that orders will be executed.

Advantages of OTC

 It is a transparent system of trading with no problem of bad or short deliveries

 Dealers can operate both in new issues and secondary market at their option.

 Information flows are free and more direct from market makers to customers since
there is close contact between them.

 It provides a trading platform for smaller and less liquid companies as they are not
qualified for listing on a standard exchange.
Disadvantages of OTC

 Trading is done directly between two parties, without the supervision of an exchange.

 . In an OTC trade, the price is not necessarily published for the public.

 Precise nature of risk and scope is unknown to regulators which leads to increased
systemic risk.