Securities Markets - Exchange Market Characteristics

The main characteristics of exchange markets can be classified into:

1. Exchange Membership
In the U.S., the listed securities exchanges classify memberships as:
  • Specialists: Specialists are the market makers for stocks, controlling the limit book and posting bid and ask prices.
  • Commission Brokers: Commission brokers are employees of a firm that is a member of the exchange. The commission broker buys and sells shares for the clients of its firm.
  • Floor Brokers: Floor brokers function much like commission brokers buying and selling shares. Unlike commission brokers who are employees of member firms however, floor brokers are independent and aid commission brokers when they become too busy.
  • Registered Traders: Registered traders are members that buy and sell for their own account. They help to provide liquidity. Because they are independent, however, the exchange places limits on how they trade.
2. Types of Orders
An order on an exchange can be classified as follows:
  • Market Order: A market order is a basic order to buy or sell a security at the best available price. For example, a client places an order to buy 100 shares of Newco; the client expects/wants the best available price for buying those shares.
  • Limit Order: A limit order places a specific price at which a transaction is executed. These orders typically have a set time horizon in which the limit order can be executed. For example, Newco's stock is trading at $50. A client places a buy limit order to purchase shares at $45. The transaction will thus be executed when the shares reach $45, if they do. Otherwise, the order will expire in the allotted time.
  • Short Sale Order: A short sale order is an order to sell shares that a client does not own. As a result, the trader must borrow the stock, sell it, and then buy the stock again to replace the shares he borrowed. For example, a client wants to sell 100 shares of Newco short at $45. The trader must borrow 100 shares, sell the 100 shares and then purchases the shares to replace the ones he borrowed. A client may do this if he believes shares of the respective company will decline below the price at which the shares were sold short.
  • Stop Loss Orders: Stop loss orders are placed in order to prevent losses on shares below a specified share price. For example, an investor bought shares of Newco at $50. The shares appreciated to $100. The investor is interested in protecting some profit on the shares of Newco in case the price starts declining. This investor may place a stop loss order on the shares of Newco at $80. If Newco's shares decline to $80, the stop loss order would be executed, protecting some of the investor's profit. Whether you use this strategy for your own or for a client's portfolio, stop loss orders are essentially a simple but powerful tool to help implement a stock-investment strategy. Find out more in the article called The Stop-Loss Order, Make Sure You Use It
3. Market Makers
Market makers facilitate the trading in a stock, buying and selling stock from their own accounts in order to maintain orderly trading and provide liquidity in a stock if it is needed. Additionally, the market maker manages the limit order book where both limit and stop orders are recorded. In the U.S. exchanges, the market maker is known as a specialist.
Short Selling
Related Articles
  1. Financial Advisors

    Tips on Passing the CFA Level I on Your First Attempt

    Obtain valuable tips and helpful study instructions that can help you pass the Level 1 Chartered Financial Analyst exam on your first attempt.
  2. Financial Advisors

    Putting Your CFA Level I on Your Resume

    Learn techniques for emphasizing your CFA Level I status in the Skills and Certifications or Professional Development section of your resume.
  3. Professionals

    Investment Analyst: Career Path and Qualifications

    Learn how to prepare for a career as an investment analyst, and read more about how many professionals in the field progress during their careers.
  4. Professionals

    CAIA Vs. CFA: How Are They Different?

    Find out how the CAIA and CFA designations differ, including which professionals should seek either title based on their career ambitions.
  5. Professionals

    Equity Investments: CFA Level II Tutorial

    Chapter 1: Equity Valuation: Its Applications and Processes Chapter 2: Return Concepts for Equity Valuation Chapter 3: Industry Analysis With Porter's 5 Forces
  6. Professionals

    What To Expect On The CFA Level III Exam

    The Chartered Financial Analyst Level III exam, which is only offered in June, is the last in the series of three tests that CFA candidates must pass.
  7. Professionals

    What To Expect On The CFA Level I Exam

    Becoming a chartered financial analyst requires the passing of three grueling exams covering an array of topics.
  8. Options & Futures

    The Alphabet Soup of Financial Certifications

    We decode the meaning of the many letters that can follow the names of financial professionals.
  9. Professionals

    How to Ace the CFA Level I Exam

    Prepare to ace the CFA Level 1 exam by studying systematically.
  10. Personal Finance

    How To Choose A Financial Advisor

    Many advisors display similar skillsets that can make distinguishing between them difficult. The following guidelines can help you better understand their qualifications and services.
  1. Personal Financial Advisor

    Professionals who help individuals manage their finances by providing ...
  2. CFA Institute

    Formerly known as the Association for Investment Management and ...
  3. Security Analyst

    A financial professional who studies various industries and companies, ...
  4. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly ...
  1. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>
  2. How do I become a Chartered Financial Analyst (CFA)?

    According to the CFA Institute, a person who holds a CFA charter is not a chartered financial analyst. The CFA Institute ... Read Full Answer >>
  3. What types of positions might a Chartered Financial Analyst (CFA) hold?

    The types of positions that a Chartered Financial Analyst (CFA) is likely to hold include any position that deals with large ... Read Full Answer >>
  4. Who benefits the most from prepaid expenses?

    Prepaid expenses benefit both businesses and individuals. Prepaid expenses are the types of expenses that are bought or paid ... Read Full Answer >>
  5. If I am looking to get an Investment Banking job. What education do employers prefer? ...

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ... Read Full Answer >>
  6. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't ... Read Full Answer >>
Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center