Structure of Markets
Written by Clayton Reeves for Gaebler Ventures
We review the theory of markets and discusses their structure in more detail. There are different kinds of markets, and they perform significantly different functions for the economy.
In a previous article entitled Basic Guide to Markets, I went over the main functions of markets and how they operate.
Markets have primary responsibilities to the economy and we explained how those responsibilities relate to small business. Now, I will go over the structure of the markets and how companies use those markets to get access to capital and invest.
First, there are basically two main types of markets: primary and secondary. Primary markets are for those that wish to get in on the first offering of a company before anyone else. Whenever a company creates an initial public offering, it is through a primary market. Generally immediately after that initial public offering, those shares are trading between investors and traders on what is termed a secondary market.
The secondary markets are what really keep the world turning. They offer access to any sort of investor, while primary markets are usually restricted to big players. Secondary markets also offer all of the important things like pricing, liquidity and reduction of costs that we discussed earlier.
As a small business owner, it may be worth getting familiar with the primary markets, as they will most likely be your route if you choose to go public. Of course, there are other options to gaining access to capital, but going public is one of the biggest injections of funds a company can get.
Organized markets are those that have fixed trading rules and an actual physical location. Trading is usually conducted by auction. Organized auction markets are generally dubbed exchanges, such as the New York Stock Exchange (NYSE) or the American Stock Exchange (Amex). These are the floors of trading that you see in commercials and Hollywood movies, where everyone is holding up a piece of paper and jostling for position.
Over the counter markets, on the other hand, are usually electronic in form and have less volume than organized markets. National Association of Securities Dealers Automated Quotation (NASDAQ) is the one of the largest over the counter markets in the world. Firms are usually regional instead of national or multinational by nature.
These exchanges facilitate the investment process in the United States. Other emerging markets are beginning to clamor for their own exchanges. Countries everywhere from the Middle East to Asia to South America are demanding some form of open exchange so they can become players in the global markets. Be wary of exchanges that are new or unstable.
The foundation of an exchange should be solid so that they can regulate with precision the trades that are made. Without that stability, there is a chance that you could be operating with false knowledge or lose your money altogether.
That is why the world chooses to do business in the United States. Our exchanges are very well maintained and generally not prone to massive sell offs. In other countries, inflation and instability can sometimes lead to massive losses of wealth.
When he's not playing racquetball or studying for a class, Clayton Reeves enjoys writing articles about entrepreneurship. He is currently an MBA student at the University of Missouri with a concentration in Economics and Finance.
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