Types of transactions on the stock exchange: a guide for investors
In this article, we will describe the main types of transactions on the stock exchange and which of them are the most profitable. This information will be useful for everyone who wants to start investing.
Types of exchange transactions and their characteristics
The following types of stock transactions can be concluded on the stock exchange of Ukraine:
- applications without address;
- applications addressed;
- quotation market;
- repo with risk control.
Applications without address
Unaddressed applications are applications exposed to open access. Such applications can be executed at any time by the second party. These are the most liquid and fast applications. It is here that such a concept as "glass" is used. Exchanges provide an opportunity to submit applications for execution by other participants.
It is worth noting that submitting such an application does not guarantee its execution, and the parties will not know who completed the application. An analogy of such an application would be exchangers, where the current exchange rate is posted and anyone can come and buy/sell currency at the stated rate. There is only one difference — in the non-addressable market, the volume of a financial asset that is ready to be bought/sold by the party that submitted the application is visible in advance.
The main types of exchange transactions also include address applications. In addressed applications, both parties agreed in advance on the price and quantity. In this case, the exchange performs the function of a technical mediator.
In order to avoid the need for identification and instant execution of the "payment against delivery" principle, the conclusion of an address exchange transaction is a convenient, generally accepted tool for the execution of typical transactions on the securities market.
Types of transactions on the stock exchange include the quotation market — а hybrid between addressed applications and non-addressed applications is available.
In this case, the party initiating the transaction posts its request for purchase/sale in the "glass" of the quotation market.
But the quotation market has 2 important differences from addressless applications:
- The initiating party is disclosed by the stock exchange.
- The transaction size is fixed.
Unlike the addressless market, where the parties do not see each other, in the case of the quotation market, the party that submitted the bid is disclosed by the exchange.
In addressless applications, the amount of the transaction is not fixed. Let's recall the example of an exchange: you posted that you are ready to sell $1,000 at such and such a rate with an addressless application. Those who are satisfied with your conditions can come to your ad and take $1, $10, $999 at a time until the initial $1,000 is completely sold.
In the case of the quote market, your order to sell $1,000 must be executed in full, that is, transactions for $1, $10, and $999 cannot be executed.
Repo with risk control
One of the relative innovations introduced in our market is repo with risk control. A repo operation is a kind of borrowing against the underlying asset. That is, the borrower provides the lender with paper, and in return receives money. After the agreed term, the borrower returns the money to the creditor together with %, and the creditor returns the paper to the borrower.
Such operations are convenient if you need money for a short period of time and you have papers on hand. Instead of selling them, you can use them as collateral for a loan.
There may be several options for the execution of this transaction, but the "beautiful" exchange option is the execution of the transaction through repo with risk control. An application for the execution of a repo with risk control hangs in a "glass" and has the advantages of an addressless market with one small nuance — in the quotation market application, the exchange discloses the counterparty. This allows you to know with whom you need to negotiate in case of changes.
It is worth noting that repo with risk control is a complex instrument. Therefore, before concluding such types of transactions on the stock exchange, we recommend that you learn all the nuances from a broker who has experience in repo with risk control.
Types of transactions on the stock exchange: what an investor should know
There are several important points that an investor should pay attention to before deciding which types of transactions on the stock exchange are of interest to him:
- Basically, all clients are given the opportunity to execute addressless orders, that is, the live market is open to potential investors and the broker provides information on the current market situation. It is worth considering that basically all brokers give the opportunity to only respond to the submitted application.
- The client has the opportunity to independently negotiate with the counterparty for the execution of the address request, in this case the broker acts purely technically to conduct the transaction. Prices and quantities are negotiated by the client independently.
- The client can ask the broker to look for something better on the market, because the broker, as a professional participant, knows most of the other market participants and can negotiate a better deal. Since each transaction is individual, it is not always possible to find something better than what is already on the market.
- Repo with risk control is a complex instrument, and if the client is interested in it, he should contact the broker to explain the many nuances and pitfalls of this instrument. Also, the broker will verify the best method of repo execution for the client.
- The market of quotations should be within the framework similar to the usual non-addressable applications, but its advantages for the ordinary investor are not obvious. In most cases, it is better to consult with a broker so that the transaction mode is the most practical for you.
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Frequently asked questions: types of stock transactions
What types of transactions on the stock exchange are the most risky
Repo with risk control is the most complex of those described above, and the sanctions for failure to execute this transaction are the most severe. In addition, posting applications in the addressless market is also the most risky. The risk is that applications will not be fulfilled because no one is interested in your offer on this day.
Who concludes any type of transaction on the stock exchange
In any case, transactions are concluded by a professional market participant on his own behalf or on behalf of his client. Accordingly, it will be either a broker/dealer or a bank with an appropriate broker/dealer license.