How securities are traded

ADS Financial markets develop to meet the needs of particular traders. Consider what would happen if organized markets did not exist. Any household wishing to invest in some type of financial asset would have to find others wishing to sell. Soon, venues where interested traders could meet would become popular. Eventually, financial markets would emerge from these meeting places. Thus, a pub in old London called Lloyd’s launched the maritime insurance industry. A Manhattan curb on Wall Street became synonymous with the financial world.

Types of Markets
We can differentiate four types of markets: direct search markets, brokered markets, dealer
markets, and auction markets.

Direct search markets A direct search market is the least organized market. Buyers and sellers must seek each other out directly. An example of a transaction in such a market is the sale of a used refrigerator where the seller advertises for buyers on Craigslist. Such markets are characterized by sporadic participation and low-priced and nonstandard goods. It would not pay for most people or firms to specialize in such markets.

Brokered markets The next level of organization is a brokered market. In markets where trading in a good is active, brokers find it profitable to offer search services to buyers and sellers. A good example is the real estate market, where economies of scale in searches for available homes and for prospective buyers make it worthwhile for participants to pay brokers to conduct the searches. Brokers in particular markets develop specialized knowledge on valuing assets traded in that market. An important brokered investment market is the primary market, where new issues of securities are offered to the public. In the primary market, investment bankers who market a firm’s securities to the public act as brokers; they seek investors to purchase securities directly from the issuing corporation.

Dealer markets When trading activity in a particular type of asset increases, dealer markets arise. Dealers specialize in various assets, purchase these assets for their own ac - counts, and later sell them for a profit from their inventory. The spreads between dealers’ buy (or “bid”) prices and sell (or “ask”) prices are a source of profit. Dealer markets save traders on search costs because market participants can easily look up the prices at which they can buy from or sell to dealers. A fair amount of market activity is required before dealing in a market is an attractive source of income. Most bonds trade in over-the-counter dealer markets.

Auction markets The most integrated market is an auction market, in which all traders converge at one place (either physically or “electronically”) to buy or sell an asset. The New York Stock Exchange (NYSE) is an example of an auction market. An advantage of auction markets over dealer markets is that one need not search across dealers to find the best price for a good. If all participants converge, they can arrive at mutually agreeable prices and save the bid–ask spread.

Notice that both over-the-counter dealer markets and stock exchanges are secondary markets.  They are organized for investors to trade existing securities among themselves.

Many assets trade in more than one type of market. What types of markets do the following 3.2
trade in?
a. Used cars
b. Paintings
c. Rare coins ADS