Stock Exchanges & Trading Members

Equity Risk & Mitigation

Sai Surya Teja Maddikonda

An exchange, is a highly organized market where (especially) tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought.

What is an Exchange?

New York Mercantile Exchange (NYMEX)

A stock exchange is a form of exchange which provides services for stock brokers and traders to buy or sell stocks, bonds, and other securities.

The securities regulation act of 1956 defined stock exchange as “an association, organization, or an individual which is established for the purpose of assisting, regulating, and controlling business in buying, selling and dealing in securities.”

New York Stock Exchange

What is a Stock Exchange?

Securities are traded on a stock exchange.

They include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds.

Stock exchanges often function as "continuous auction" markets, with buyers and sellers consummating transactions at a central location, such as the floor of the exchange.

Modern markets are electronic networks, which gives the advantages of increased speed and reduced cost of transactions.

Trade on an exchange is by members only.

What happens in a stock exchange?

The initial public offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market.

A stock exchange is often the most important component of a stock market.

Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks.

Order Entry Book

What happens in a stock exchange?

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange.

Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

In recent years, various other trading venues, such as electronic communication networks, alternative trading systems and dark pools have taken much of the trading activity away from traditional stock exchanges.

Points to be noted

To the Individuals • As an investment channel• Gaining protection• Receiving information

To business firms • Raising capital• Boosting credibility

To the economy

• Raising capital for the public and government corporations

• Fully utilizing resources• As an economic indicator

Why opt for stock exchanges?

Broker-dealer Day trader Floor broker Floor trader Investor Market maker

Proprietary trader Quantitative analyst Regulator Stock trader

Who are Trading Members?

Basically, all of these do is Selling and Buying.

They are differentiated based on:their location of operation, whose behalf they trade, what strategies they use to trade etc.

Raising capital for businessGoing publicLimited partnershipsVenture capitalCorporate partners

Mobilizing savings for investments Facilitating company growth Profit sharing Corporate governance Creating investment opportunities for small investors Government capital-raising for development projects Barometer of the economy

Role of Stock Exchanges

Risk is the potential of losing something of value. Financial risk is an umbrella term for multiple types

of risk associated with financing. Risk is a term often used to imply downside risk, meaning the

uncertainty of a return and the potential for financial loss.

What is risk?

Credit Risk

• Concentration risk

• Consumer credit risk

• Credit derivative

• Securitization

Market Risk

• Commodity risk• Equity risk• Foreign exchange risk

• Interest rate risk

• Volatility risk

Liquidity Risk

• Refinancing risk

Operational Risk

• Legal risk• Political risk• Reputational risk

• Settlement risk• Valuation risk

Risk management is the process of measuring, or assessing risk and then developing strategies to manage the risk while attempting to maximize returns.

Typically involves utilizing a variety of trading techniques, models and financial analyses. 

How to manage risk?

Scanning Take Position Monitor Exit

The process of Trading

Stop-Loss, Take-Profit, Entry, Exit Criteria

Before you trade a stock, know how much you are willing to lose. 

Check the Liquidity: can you buy or sell promptly.

Determine the Stop-Loss level before trading. 

Determine your profit target (take-profit level). 

Buy the stock only at an acceptable price level. Use a limit order when you buy a stock.  

Take profit when the trade reaches your profit target. 

Equity Risk Management

Follow the trend of the market: A market trend may last a single day, a month or a year and again short term trends operate within long term trends.

Portfolio Diversification:  To diversify your risk by investing in a portfolio. In a portfolio you diversify your investment to several companies, sectors and asset classes.

There is a probability that while the market value of a certain investment decreases that of the other may increase.

Equity Risk Management (cont’d)

Thank You