BALOCHISTAN UNIVERSITY OF

INFORMATION TECHNOLOGY, ENGINEERING

AND MANAGEMENT SCIENCES

“ASSIGNMENT # 1”

TOPIC: STOCK EXCHANGE AND OVER THE

COUNTER MARKET

SUBMITTED BY: MADEEHA SAYYED

DEPARTMENT: BSBA- 7th B

DATE OF SUBMISSION: 20th, October, 2009

SUBJECT: Financial Management

SUBMITTED TO: Mam Fiza Ali

 STOCK EXCHANGE AND OVER THE COUNTER MARKET

Stock exchange and Over the Counter (OTC) market are the types of financial market
who connect the borrowers of funds and the lenders of funds. Stock exchange and
OTC market will be explained in this assignment and at the end, their respective
.differences will be highlighted

STOCK EXCHANGE
Cambridge dictionary defines stock exchange as "a place where parts of the
ownership of companies are bought and sold, or the organization of people whose job
is to do this buying or selling". Some of the famous stock exchanges are NYSE,
AMEX. There is limited number of corporations that can sell their shares on the stock
exchange. To be listed on the stock exchange corporations have to go through lengthy
legal proceedings. Once listed on the stock exchange corporations can raise funds by
.offering their shares in the stock exchange

Working of a Stock Exchange

Stock exchanges are formal organizations, usually with a physical location work a lot
more like auction markets. A well organized stock exchange has a board of governors
who monitor its working. There are members of the stock exchange who are officially
authorized to trade the various securities listed on the stock exchange. These members
also work on the behalf of the actual investors. This shows that members at the stock
exchange also work as intermediary between the corporation and the investors- in
."stock market these intermediaries are known as "Stock Brokers

In order to buy stock e.g. at New York Stock Exchange (NYSE), the investor does not
have to go to the NYSE, rather he will buy his desired stock via stock broker, who
will perform on behalf of the investor. There are dozens of brokerage houses working,
some of the famous ones are Merrill Lynch, Morgan Stanley and Charles Schwab.
The stock brokers often charge a commission for their services. These stock brokers
apart from just trading stocks also provide useful information regarding which stock
to invest and which one to avoid, when to buy and when to sell the stock in order to
maximize the investor's profit. The stock price of a company is determined by the
speculation regarding the future of the company, company’s financial performance,
.political-economic conditions of the country and many other factors
Stock exchange plays a vital role in the financial system. Without stock exchange it
would have been very difficult for the corporations and the investors to coordinate
.with each other

OVER THE COUNTER MARKET

Usually large organizations are able to float their shares over the stock exchange for
trading. Stock exchanges have detailed rules and regulations for the floating of shares
which mostly organizational giants are able to fulfill conveniently as compared to
small corporations. Then how should these undersized corporations raise funds from
the general public when stock exchange is not approachable for them? The answer to
.this problem lies with Over the Counter (OTC) Markets

Business dictionary defines OTC markets as "OTC securities trading system in which
brokers or dealers (called market makers) negotiate over telephone or computerized
networks instead of through a stock exchange. Trading rules for this market are
established and enforced by the National Association of Securities Dealers. In dollar
terms, it is the largest securities market in the US. Also called outside market or third
market. E.g. NASDAQ- National Association of Securities Dealers Automated
".Quotation

Working of OTC Market

OTC market, unlike a stock exchange, has no physical location. Rather brokers and
investors deal with each other over computerized systems and telephones. In trade
OTC is referred as "the street". In OTC market number of intermediaries or stock
brokers is higher than the stock brokers of a well organized stock exchange. As the
concentration of intermediaries is higher there is intense competition between them
which reduces the transaction cost i.e. commission of brokers shrinks which
.ultimately benefits the investor

The computerized systems are equipped with matching engines that help to match the
needs of buying and selling parties and trade takes place at the best possible price
acceptable to both the parties. Like in NASDAQ brokers are connected with each
 other via thousands of computers which all are then connected with the central
computerized system of NASDAQ. The NASDAQ is so efficient that it releases
minute by minute changes in the stock prices and thus makes trading incredibly
convenient. Shares listed on the stock exchange can also be legally sold over the
counter. OTC market is also famous for trading of foreign exchange. OTC market
plays a significant role in raising funds for less recognized corporations. Recently the
trading volume of OTC market had surpassed the trading taking place in stock
.exchanges, though OTC market tends to be more risky than stock exchanges

DIFFERENCE BETWEEN STOCK EXCHANGE AND OTC MARKET

STOCK EXCHANGE OTC MARKET

Has detailed rules and regulations in Rules and regulations to trade are quiet
order to be enlisted lax
Has a physical location or venue Has no physical location

Highly regulated therefore Less regulated therefore comparatively

comparatively less risky more risky
Cost of transaction is high Cost of transaction is low

Centralized due to fewer intermediaries Decentralized due to the presence of

or stock brokers
Mostly for large corporations that have
stable credit rating
Comparatively less high-tech and
communication b/w concerned parties
can also take place face to face (e.g.
(NYSE
multiple intermediaries or stock
.brokers
Mostly for Small corporations that are
less recognized
more high-tech and communication b/w
concerned parties takes place via
( electronic devices (e.g. NASDAQ

These are the considerable differences between the stock exchange and OTC market.
Both play an essential role in constructing an efficient financial system by connecting
the deficit and surplus units of the economy through competent intermediaries or
.stock brokers