Knowledge Center Fundamental Analysis

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Different Kinds Of Transactions In the Stock Market

What Is Market Transaction?

A stock market transaction in the Indian stock market involves the immediate buying or selling of financial instruments like stocks at the current market price. Investors use stockbrokers to execute these trades on stock exchanges such as BSE and NSE. Transactions occur in real-time, reflecting dynamic market prices. Liquidity, impacted by a stock's ease of trade, influences the efficiency of market transactions. Overall, market transactions contribute to price discovery and liquidity in the Indian stock market.

Market Transaction Examples

A typical example would be an investor instructing their broker to buy 100 shares of a specific company's stock at the current market price. The broker then executes the trade immediately on the stock exchange at the prevailing market rate, and the investor becomes the owner of the purchased shares at the conclusion of the transaction.

Types Of Stock Market Transactions

Stock exchange transactions encompass a wide range of activities, each designed to serve specific objectives and trading strategies. Here's a detailed exploration of various types of stock market transactions:

  1. Market Order:

    • Description: Market orders are instructions to buy or sell a security at the best available current market price.

    • Purpose: Ensures immediate execution, but the exact price may vary.

  2. Limit Order:

    • Description: Limit orders allow investors to specify the maximum price they are willing to pay (for buy orders) or the minimum price they are willing to accept (for sell orders).

    • Purpose: Provides control over the execution price, but there's no guarantee of execution if the market doesn't reach the specified limit.

  3. Stop-Loss Order:

    • Description: A stop-loss order converts into a market order when a security's price reaches a predetermined level, helping limit potential losses.

    • Purpose: Risk management by automatically selling a security if its price falls to or below the stop price.

  4. Trailing Stop Order:

    • Description: Similar to a stop-loss order but with a dynamic adjustment of the stop price as the security's market price moves favourably.

    • Purpose: Allows investors to lock in profits while allowing for potential further gains.

  5. Stop-Limit Order:

    • Description: A combination of a stop order and a limit order. When the stop price is reached, it becomes a limit order.

    • Purpose: Provides price control while protecting against unfavourable market movements.

  6. Market-on-Close (MOC) Order:

    • Description: MOC orders are executed at the closing price of the trading day.

    • Purpose: Useful for investors wanting to participate in price movements occurring at the end of the trading session.

  7. Market-on-Open (MOO) Order:

    • Description: MOO orders are executed at the opening price of the trading day.

    • Purpose: Allows investors to take advantage of specific market conditions or news affecting the security's price at the opening bell.

  8. All-or-None (AON) Order:

    • Description: AON orders stipulate that the entire order must be executed at once or not at all.

    • Purpose: Particularly useful for large block trades where partial execution may not align with the investor's strategy.

  9. Fill or Kill (FOK) Order:

    • Description: FOK orders demand immediate and complete execution. If the entire order cannot be filled instantly, it is cancelled.

    • Purpose: Ensures quick and full execution or none at all.

  10. Immediate or Cancel (IOC) Order:

    • Description: Similar to FOK orders but allows for partial execution. Any portion that cannot be filled immediately is cancelled.

    • Purpose: Provides flexibility for partial fills while maintaining a time-sensitive approach.

  11. Good Till Cancelled (GTC) Order:

    • Description: GTC orders remain active until executed or manually cancelled by the investor.

    • Purpose: Suitable for investors with a longer-term outlook, allowing them to keep the order active over multiple trading days.

  12. Buy-Write Order:

    • Description: Involves simultaneously buying a stock and selling a call option on that stock.

    • Purpose: Generates income for the investor through the premium received from selling the call option.

  13. Sell-Stop Order:

    • Description: A sell-stop order becomes a market order when the security's price falls to or below a specified stop price.

    • Purpose: Used to limit losses or protect profits in a declining market.

  14. Buy-Stop Order:

    • Description: A buy-stop order becomes a market order when the security's price rises to or above a specified stop price.

    • Purpose: Capitalizes on upward price movements.

  15. Bracket Order:

    • Description: An advanced order involving the simultaneous placement of a market order, a target order (to take profits), and a stop-loss order (to limit losses).

    • Purpose: Automates aspects of trade management, providing a comprehensive strategy.

  16. Algorithmic Trading:

    • Description: Utilizes computer algorithms to automatically execute trades based on predefined criteria.

    • Purpose: Analyses market data, identifies trends, and executes orders at high speeds. Strategies range from simple to highly complex.

  17. Dark Pools:

    • Description: Private exchanges or forums where institutional investors trade large blocks of shares away from the public eye.

    • Purpose: Offers increased privacy and reduced market impact for significant transactions.

  18. Margin Trading:

    • Description: Involves borrowing funds to trade more securities than the investor's capital.

    • Purpose: Amplifies potential gains but increases the risk of losses. Traders need a margin account with a brokerage firm.

  19. Off-Market Transactions:

    • Description: Occur outside the formal stock exchange platform, often negotiated directly between buyers and sellers.

    • Purpose: May involve unique terms and conditions not publicly disclosed, providing flexibility for customized deals.

  20. Block Trade:

    • Description: Involves the buying or selling of a large quantity of shares, typically in increments larger than 10,000 shares.

    • Purpose: Often executed off the main exchange to minimize market impact for significant transactions.

  21. Cross Transaction:

    • Description: Occurs when a broker matches buy and sell orders within the same brokerage firm.

    • Purpose: Facilitates trades without impacting the broader market, common in larger institutional transactions.

  22. Social Trading:

    • Description: Platforms allowing investors to follow and replicate the trades of experienced traders.

    • Purpose: Combines social interaction with investment strategies, providing a learning and sharing environment.

  23. Initial Public Offerings (IPOs):

    • Description: The first sale of a company's stock to the public.

    • Purpose: Investors can participate in IPOs to acquire shares of a newly listed company.

  24. Rights Issues:

    • Description: Companies offer existing shareholders the opportunity to buy additional shares at a discounted price.

    • Purpose: Shareholders can exercise their rights or sell them in the market.

  25. Preferential Allotment:

    • Description: Companies issue shares to a specific group of investors at a predetermined price.

    • Purpose: A way for companies to raise capital from selected investors.

  26. Buyback Transactions:

    • Description: Companies repurchase their own shares from the market through buyback transactions.

    • Purpose: A corporate action to return excess capital to shareholders or enhance the company's stock value.

Understanding these various types of stock market transactions empowers investors and traders to make informed decisions, tailor strategies to their goals, and navigate the complexities of the financial markets effectively. Each transaction type serves a specific purpose, providing flexibility for participants to adapt to different market conditions and achieve their investment objectives.

Types of Stock Market Transactions Based on Settlement Date 

We may undertake a few types of transactions in the securities market array for immediate settlement to the distant settlement.

Transaction kinds differ based on transactions in the stock market or outside the stock market (called OTC Trades). A concise explanation of diverse kinds of transactions is mentioned below:

Cash Trades:

  • Cash trades are the trades where settlement (payment and delivery) take place on the same trading day (T+0, where 0 terms the time gap in days between trade day and settlement day).

  • Cash trades in Financial Markets are strange as most contracts are settled between two to three days from the date of the trade.

  • On the other hand, we see cash transactions in our everyday day-to-day life when we buy groceries, vegetables, and fruits from the market.

Tom Trades

Tomorrow trades are the trades where settlement (payment and delivery) take place on the day next to the trading day (T+1, where 1 term is the time gap in days between trade and settlement day). Some of the transactions in the Foreign Exchange Market (FX market) settle on a T+1 basis

Spot Trades

  • Spot trades are the trades where settlement (payment and delivery) takes place on the spot date, which is usually two business days after the trade date.

  • Equity markets in India present Spot trades. FX markets worldwide, by default, offer spot transactions in foreign exchange.

 Forward Transactions

  • Forward contracts are a contractual agreement between two parties to buy or sell an underlying asset at a specific future date for a particular price that is decided on the date of the contract.

  • Both the contracting parties are dedicated and indebted to honour the transaction irrespective of the underlying asset price at the time of settlement. Since forwards were arranged between two parties, the terms and conditions of contracts were customized. These are Over-the-counter (OTC) contracts.

Example:

  • A farmer agrees to sell his produce of barley to a miller, 6 months later, when his crop is ready, at a price that both counterparties are in agreement with today.

  • This is an OTC executed forward contract. It can be settled in cash or outcome in the actual delivery of barley.

  • The settlement conditions such as quantity and quality of the product, the price and payment terms, position benchmark in case of cash settlement of the contract, etc., are determined by the counterparties at the time of entering into a contract.

  • These contracts bear counterparty risk if either of the parties in the trade fails to honour his side of the contract.

  • Consequently, these contracts are generally entered between known parties and lean on informal protection mechanisms to ensure that the contract is honoured. In several parts of India, the forward markets in commodities are based on mutual trust and are functional despite the risks involved.

Swaps

In the financial markets, a swap is a derivative contract made between two parties to exchange cash flows in the future according to a pre-organized formula. Swaps assist market participants control risks related to volatile interest rates, currency rates, and commodity prices.

Example:

  • On a borrowing, the borrower has to pay a quarterly interest rate, which is defined as the Treasury bill rate on that date plus a spread.

  • This floating rate interest payment means that the actual obligation of the borrower will depend on what the Treasury bill rate would be on the date of each settlement of interest obligation. On the other hand, the borrower prefers to pay a fixed rate of interest.

  • He can utilize the interest rate swap market to get into the following swap order:

  • Every quarter must pay a fixed rate to the swap dealer

  • Receive T-bill plus spread from the swap dealer every quarter

  • The swap in this contract is nothing but that one party pays a fixed rate to the other and receives a floating rate in return.

  • The principal amount on which the interest will be calculated is agreed upon between counterparties (called notional of the trade).

  • Only the interest rate on this amount is exchanged on each settlement date (every quarter) between counterparties.

Which Of the Following Securities Transactions Do Not Take Place in The Market?

Securities transactions that do not take place in the open market are often conducted through off-market transactions. Off-market transactions refer to trades that occur outside the formal exchange platform. Here are some examples:

  1. Private Placements:

    • Description: Companies may issue securities directly to a select group of investors, such as institutional investors or high-net-worth individuals, without involving the public market.

    • Purpose: Raise capital without the need for public offerings.

  2. Preferential Allotment:

    • Description: Companies may issue new shares to a specific group of investors at a predetermined price.

    • Purpose: Often done to infuse capital or bring in strategic investors.

  3. Rights Issues:

    • Description: Existing shareholders are given the right to buy additional shares at a discounted price directly from the company.

    • Purpose: Allows current shareholders to maintain their ownership stake and raise capital for the company.

  4. Buyback Transactions:

    • Description: Companies repurchase their own shares from the market, often from existing shareholders.

    • Purpose: Can enhance shareholder value and provide an avenue to return excess capital to investors.

  5. Off-Market Trades:

    • Description: Direct negotiations between buyers and sellers outside the formal exchange.

    • Purpose: Allows for customized deals and transactions with specific terms.

  6. Over-the-Counter (OTC) Transactions:

    • Description: Securities traded directly between two parties, often facilitated by brokers, without a centralized exchange.

    • Purpose: Offers flexibility and privacy, common for certain types of bonds and derivatives.

  7. Private Equity Transactions:

    • Description: Investments in private companies where shares are not publicly traded.

    • Purpose: Investors provide capital to private firms in exchange for equity ownership.

  8. Venture Capital Investments:

    • Description: Investment in early-stage companies, often before they go public.

    • Purpose: Supports startups and emerging businesses in exchange for an ownership stake.

These transactions are typically negotiated directly between parties and may not be subject to the same level of transparency or regulatory oversight as transactions that occur on public exchanges. While they serve specific purposes for companies and investors, they may involve higher levels of risk and are often tailored to meet the specific needs of the parties involved.

Frequently Asked Questions

What Is Cash Trading in the Share Market?

Cash trading in the share market involves the direct exchange of stocks for cash. In India, it follows a T+2 settlement cycle, meaning the actual transfer of shares and funds occurs two business days after the trade. It contrasts with derivative trading, which settles on a T+1 basis and involves contracts rather than the physical exchange of securities.

How Many Types of Trading in the Share Market?

There are two main types of trading in the share market: cash trading, involving the physical exchange of stocks for cash, and derivative trading, which involves contracts based on the price movement of underlying assets.

Can I cancel or modify a stock market transaction after placing an order?

Once an order is placed in the stock market, it cannot be cancelled or modified. It is essential to carefully review and confirm orders before execution.

How does derivative trading differ from cash trading?

Derivative trading involves contracts based on the price movement of underlying assets and settles on a T+1 basis, contrasting with cash trading, which is the direct exchange of stocks for cash.

What is the settlement cycle for stock market transactions in India?

In the cash market, transactions follow a T+2 settlement cycle, meaning the exchange of shares and funds occurs two business days after the trade.

 

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