Organised Securities Markets:

An organized securities exchange is defined as "A securities marketplace where purchasers and
sellers regularly gather to trade securities according to the formal rules adopted by the
exchange.

Stock exchange or organized stock exchange (also called stock market or share market) is one
important constituent of capital market. It is an organized market for the purchase and sale of
industrial and financial security. It is convenient place where trading in securities is conducted
in systematic manner i.e. as per certain rules and regulations. It performs various functions and
offers useful services to investors and borrowing companies. It is an investment intermediary
and facilitates economic and industrial development of a country.

Stock exchange is an organized market for buying and selling corporate and other securities.
Here, securities are purchased and sold out as per certain well defined rules and regulations. It
provides a convenient and secured mechanism/platform for transactions in different securities.
Such securities include shares and debentures issued by public companies which are duly listed
at the stock exchange and bonds and debentures issued by government, public corporations
and municipal and port trust bodies.

Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector
in a free market economy. A stock exchange need not be treated as a place for speculation or
a gambling den. It should act as a place for safe and profitable investment, for this, effective
control on the working of stock exchange is necessary. This will avoid misuse of this platform
for excessive speculation, scams and other undesirable and anti-social activities.

London stock exchange is the oldest stock exchange in the world. In India, Bombay (Mumbai)
stock exchange is the oldest. Stock exchanges exist and operate in large majority of countries
of the world.

Definitions of Stock Exchange

(1) According to Husband and Dockerary "stock exchanges are privately organized markets
which are used to facilitate trading in securities".

(2) The Indian Securities Contracts (Regulation) Act of 1956 defines stock exchange as "an
association, organization or body of individuals, whether incorporated or not, established for
the purpose of assisting, regulating and controlling business in buying, selling and dealing in
securities".

Salient Features of Stock Exchange

1. Market for securities: Stock exchange is a market, where securities of corporate bodies,
government and semi-government bodies are bought and sold.
2. Deals in second hand securities: It deals with shares, debentures bonds and such securities
already issued by the companies. In short it deals with existing or second hand securities and
hence it is called secondary market.
3. Regulates trade in securities: Stock exchange does not buy or sell any securities on its own
account. It merely provides the necessary infrastructure and facilities for trade in securities to
its members and brokers who trade in securities. It regulates the trade activities so as to
ensure free and fair trade
4. Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of
securities that could be purchased and sold on its floor. Securities which do not figure in the
official list of stock exchange are called unlisted securities. Such unlisted securities cannot be
traded in the stock exchange.
5. Transactions effected only through members : All the transactions in securities at the stock
exchange are effected only through its authorised brokers and members. Outsiders or direct
investors are not allowed to enter in the trading circles of the stock exchange. Investors have
to buy or sell the securities at the stock exchange through the authorised brokers only.
6. Association of persons : A stock exchange is an association of persons or body of individuals
which may be registered or unregistered.
7. Recognition from Central Government : Stock exchange is an organised market. It requires
recognition from the Central Government.
8. Working as per rules : Buying and selling transactions in securities at the stock exchange are
governed by the rules and regulations of stock exchange as well as SEBI guidelines. No
deviation from the rules and guidelines is allowed in any case.
9. Specific location : Stock exchange is a particular market place where authorised brokers
come together daily (i.e. on working days) on the floor of market called trading circles and
conduct trading activities. The prices of different securities traded are shown on electronic
boards. After the working hours market is closed. All the working of stock exchanges is
conducted and controlled through computers and electronic system.
10. Financial Barometers : Stock exchanges are the financial barometers and development
indicators of national economy of the country. Industrial growth and stability is reflected in the
index of stock exchange.

Over the counter Securities Market:

A security traded in some context other than on a formal exchange such as the NYSE, TSX,
AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer
network as opposed to on a centralized exchange. It also refers to debt securities and other
financial instruments such as derivatives, which are traded through a dealer network.

In general, the reason for which a stock is traded over-the-counter is usually because the
company is small, making it unable to meet exchange listing requirements. Also known as
"unlisted stock", these securities are traded by broker-dealers who negotiate directly with one
another over computer networks and by phone.
Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as
OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally
unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink
sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks
or are offered by companies with bad credit records.

Instruments such as bonds do not trade on a formal exchange and are, therefore, also
considered OTC securities. Most debt instruments are traded by investment banks making
markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the
bank that makes the market in that bond and asks for quotes.
In the OTC market, trading occurs via a network of middlemen, called dealers, who carry
inventories of securities to facilitate the buy and sell orders of investors, rather than providing
the order matchmaking service seen in specialist exchanges such as the NYSE.

Over the counter market is a decentralized market of securities not listed on an exchange
where market participants trade over the telephone, facsimile or electronic network instead of
a physical trading floor? There is no central exchange or meeting place for this market.

Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as

stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with
exchange trading, which occurs via facilities constructed for the purpose of trading (i.e.,
exchanges), such as futures exchanges or stock exchanges.
In the U.S., over-the-counter trading in stock is carried out by market makers that make
markets in OTCBB and Pink Sheets securities using inter-dealer quotation services such as Pink
Quote (operated by Pink OTC Markets) and the OTC Bulletin Board (OTCBB). OTC stocks are not
usually listed nor traded on any stock exchanges, though exchange listed stocks can be traded
OTC on the third market. Although stocks quoted on the OTCBB must comply with U.S.
Securities and Exchange Commission (SEC) reporting requirements, other OTC stocks, such as
those stocks categorized as Pink Sheets securities, have no reporting requirements, while those
stocks categorized as OTCQX have met alternative disclosure guidelines through Pink OTC
Markets.

An over-the-counter contract is a bilateral contract in which two parties agree on how a

particular trade or agreement is to be settled in the future. It is usually from an investment
bank to its clients directly.

An over-the-counter (OTC) securities market is a secondary market through which buyers and
sellers of securities (or their agents or brokers) consummate transactions. Secondary markets
(securities markets where previously issued securities are re-traded) are mainly organized in
two ways. One is to form an organized exchange, where buyers and sellers of securities (mostly
represented by their agents or brokers) meet at a central place to conduct transactions. The
New York Stock Exchange (NYSE), the American Stock Exchange (located in New York) and the
Chicago Board of Trade for Commodities are examples of major organized exchanges in the
United States. An over-the-counter securities market provides an alternative way of organizing
a secondary market—in this, dealers with inventories of securities at different geographical
locations are in contact with each other through a computer network. In other words, these
dealers of securities are ready to buy or sell securities over the counter to anyone who
contacts them and accepts their quoted price. One may thus describe an over-the-counter
securities market as an electronic market. The National Association of Securities Dealers
Automated Quotations System (now generally referred to simply as "the Nasdaq") is an example
of an over-the-counter securities market in the United States.

THE EVOLUTION OF THE OVER-THE-COUNTER MARKETS

The NASDAQ over-the-counter market was established in 1971. Before the NASDAQ was
instituted, trading in OTC securities used to be a rather haphazard operation—individual
broker/dealer firms bought and sold securities for their own accounts. In doing so, they acted
as dealers, not brokers. For larger OTC stocks, a dozen or so firms quoted bid and asked prices
for securities—account executives relied on these quoted prices in buying and selling securities
for customers. However, for many small over-the-counter securities, only a couple of firms
made a market—that is, quoted bid and asked prices. Thus, one could never be sure if one got
the best price. Moreover, record keeping was done on "pink sheets" that recorded bids and
offers, not actual trades. The computer system replaced the telephone communications
mechanism in 1971 and provided a far better method of uncovering the best price.

EFFICIENCY OF THE OTC MARKETS

Since over-the-counter securities dealers are in computer contact with each other, they know
the prices set by one another. As a result, an OTC market is very competitive and is not
significantly different from a securities market that utilizes an organized exchange.
Nevertheless, it is fair to say that the stocks of many large and well known corporations are
traded on the NYSE, often called the Big Board. This provides the NYSE with high visibility—it is
considered the real marketplace. The trading in shares of approximately 2,000 corporations
takes place on the floor of the exchange; transactions are recorded on an electronic ticker
tape flashed on the floor itself as well as in brokerage offices throughout the country. As a
consequence of the emphasis on Big Board stocks, the common stocks listed on over-the-
counter markets are often called secondary issues.

OTC MARKETS FOR DIFFERENT SECURITIES

There are over-the-counter securities markets for a variety of financial securities or
instruments. The most widely followed is the over-the-counter market in common stocks. While
many large corporations have their stock traded at the New York Stock Exchange, not all
common stocks traded in the NASDAQ market are small. For example, IBM Corp., AT&T, or
General Motors Corp. stocks (that are also part of the 30 common stocks included in the widely
followed Dow Jones Industrial Average index) are traded on the Big Board. However, many
widely known common stocks, such as Intel Corp. or MCI Communications Corp., are traded in
the over-the-counter stock market. Both the NYSE and the NASDAQ market have a large
number of small common stocks.
The financial market in U.S. government bonds is also set up as an over-the-counter market. It
is important to note that the U.S. government bond market has a larger trading volume than
the NYSE. The OTC market in government bonds was established by approximately 40 dealers in
Treasury bonds who were ready to buy and sell Treasury securities.

Over-the-counter securities markets exist in other financial instruments, in addition to common

stocks and government bonds. Markets for several money-market financial instruments are also
established as over-the-counter markets. For example, negotiable certificates of deposit,
banker's acceptances, and federal funds are all traded in over-the-counter securities markets.
There are OTC markets in non-money market instruments as well. These include trading in a
foreign exchange.

DERIVATIVES AND THE OTC MARKETS.

The relatively newly issued financial instrument known as a derivative is also traded in the OTC
securities markets. Peter Abken (in Economic Review) discusses the implications of derivative
securities trading in the over-the-counter markets. He points out that, aside from their
complexity, the largely unregulated character of the OTC derivatives markets sets them apart
from the financial markets for other securities, due to their extremely rapid growth and fast
pace of innovation. In recent years, over-the-counter derivatives have become a mainstay of
financial risk management and are expected to continue growing in importance, according to
Abken. The current structure of the OTC markets is being closely examined, and a set of
recommendations has been made. The central policy question in derivatives regulation debated
by Abken is whether further federal regulation is appropriate, or whether the existing structure
can oversee these markets.

BID-ASK PRICES AND THE DEALER'S SPREAD

The bid price is the amount that a securities dealer must pay to obtain a security, while the
ask price is the amount that a securities dealer receives after selling it. Frederic S. Mishkin
commented in The Economics of Money, Banking, and Financial Markets that "you might want
to think of the bid price as the 'wholesale price' and the asked price as the 'retail' price."

The ask price for securities is higher than the bid price. The difference between the two prices
provides the dealer with his profit margin, compensating the dealer for his work. This
compensation amount is known as the dealer's spread. Since securities can rise or fall in price
during the period that the dealer owns them, thus impacting a dealer's ability to secure an
acceptable asking price, this business can be a tricky one.