Internalization

What is 'Internalization'

Internalization can refer to any process that is handled within a particular entity instead of directing it to an outside source for completion. In business, internalization is a transaction conducted within the confines of a corporation rather than in the open market. Internalization can apply to a multinational corporation shifting assets between subsidiaries across borders.

BREAKING DOWN 'Internalization'

In investing, internalization refers to the decision by a brokerage firm to fill a buy order for shares of security from its own inventory of shares rather than seeking to execute the trade using outside inventory.

Internalization can occur when an individual, business, or firm determines handling the issue in-house is beneficial. This can include producing a particular material for a product instead of arranging to have it created by another manufacturer, a process called internal sourcing, or delivering products to customers through the business’s own methods instead of using an outside shipping company.

Internalized Trading

A trade may be considered internalized when the trade is completed for an investor within their associated brokerage firm, allowing the trade to complete by using securities currently held by the aforementioned firm. Internalization of trades can provide a variety of benefits, depending on the nature of the transaction. The process is often less expensive than alternatives as it is not necessary to work with an outside firm to complete the transaction.

Brokerage firms that internalize securities orders can also take advantage of the difference between what they purchased shares for and what they sell them for, known as the spread. For example, a firm may see a greater spread by selling its own shares than by selling them on the open market. Additionally, because shares are not conducted on the open market the brokerage firm is less likely to influence prices if it sells a large portion of shares.

Internal Sourcing

Internal sourcing refers to the process of acquiring any needed asset, service, or material from within the business instead of from an external source. Most commonly, this refers to a business’s decision to produce certain goods internally that are needed to maintain other business operations instead of having an outside supplier.

Internal sourcing can also refer to internal hiring practices where preference is given to current employees when recruiting for a vacancy, as well as choosing to keep certain business activities within the business structure, such as with marketing activities.

A business may work to keep its financing source internalized, focusing on the reinvestment of certain assets back into the business instead of acquiring outside financing or investment.

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