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I have not blogged for a couple of years due to the family commitment, now I have time to share my experiences with you all.
okay, let’s go – Many QA working in Investment Banking domain without Business Knowledge (even I was & I am now :p). So, I myself sneaked into google & referred few books. Now I am going to blend my day to day experience with the theoretical knowledge.
Let me give you a classic and simple example of how trade happens?
Asik wants to buy an Apple iPhone from Amazon. Here Asik & Amazon are considered as COUNTERPARTIES and the iPhone is considered as PRODUCT that is being traded. Asik places an order by paying $1000 for 1 iPhone. The No of iPhone is nothing but NOTIONAL. The Amazon is an online e-commerce website – this is called the Market Place. So when Asik places an order, he should check the availability and Asik should accept the money that was mentioned in the website here if SIZE & PRICE should match for trade to happen.
After Order is placed, Amazon should accept the ORDER– soon the SIZE & PRICEmatches Amazon will tag that product to Asik, so the TRADE took place.
There are different types of Order & Trade status maintained before the Order gets FILLED (Order Size & price fulfilled and the Order is closed after the Trade completely Fills )
Sample Order & Trade Status – New, Pending New, Pending Cancel, Cancel Request, Cancelled, Filled, Done for the Day (I will explain each status in upcoming posts – Don’t worry :p).
Okay, now why People, Industries, and Investment banks TRADING?
- If I want to increase my current then I will go to the market and BUY STOCK
- I want to get rid of 50% of my stock because I anticipate there will be price Drop – SELL
- To make the profit when he/she anticipates there will be the Price spike
- To reduce the RISK by considering the future Event.
BUY or SELL is considered as SIDE of the Order/Trade – Buy Trade / Sell Trade or Buy Order / Sell Order.
Who are all the typical Market participants in any Trading activities?
- PRODUCER or MANUFACTURE
- CONSUMER or CUSTOMERS
- SPECULATOR or MARKET WATCHER
- MARKET MAKERS
WHO IS/ARE PRODUCER?
- Apple manufacture (producer) has invested 100 $ millions to produce iPhone XI.
- The entire income of Apple depends on the Total No of units (Size) and price of each unit.
- Apple can maximize the no of units produced however they can predict little on Price.
- To avoid the risk, Apple Fixes a Target Price & no of units that will be sold to Apple Dealers
WHO IS/ARE CONSUMER?
- Apple wants few thousands of OLED Screens for their new iPhone Model so they are ready to pay more money to Samsung to get the product on time to market.
- So Samsung reduces his exposure to the OLED Screens to manage the Supply & DemanD
WHO IS/ARE SPECULATOR?
- Best Buy Store (Speculator) takes a view on the likely direction of the price change.
- Best Buys the Apple units on Foward contract when they anticipate the shortage of iPhone units in the US market and supply later.
- Best Buy sells the Apple units if the anticipated future glut (new products introduced by another vendor)
High-Level Trade Flow
BROKER –> EXCHANGE –> OTC – Overt the Counter.
- If an Individual wants to buy some EQUITIES from the market, he can’t go directly to the MARKET and BUY/ SELL the EQUITIES.
- Because your BUYER or SELLER doesn’t know your creditworthiness
- You will not have the liquidity of the Equity.
So individuals or small-scale institutional customers will go to Broker for their trading requirements.
- An organized place where anyone can trade any available Products
- Only EXCHANGES will display BUY & SELL Price of an asset.
- Makes sure enough liquidity of the Product available in the Exchange
- Assessing the Counterparty Risk limitations
- Electronic Traded Exchanges – the Virtual marketplace
Over the Counter – OTC
- Exchanges are operated for certain hours, if anyone wants to BUY/SELL any products then they have to go to Over the Counter market.
- Exchanges will not have all the products, because of Product Limitations, one should go to OTC to trade.
- Only certified people can trade in EXCHANGES, however, OTC any nonmembers also can trade any Products.
Trading Life Cycle will be continued in next Post.
Thanks – Asik