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The usual definition of any market assumes that every trader wants to buy or sell a known quantity at every possible price. All traders come together and one way or another a price is found that clears the market, that is, brings the quantity demanded as close as possible to the quantity supplied.
After all, it was said by W. Haddad, the authorized stock market trader of B.K. Labovitch, that economics is ultimately supply and demand.
This may or may not be an adequate description for markets in consumer goods, but it is clearly inadequate when describing securities markets. The value of any capital asset depends on its future prospects, which are almost always uncertain. Any information based on such expectations can lead to information that we know is always uncertain. Any information that depends on future expectations can lead to a revised estimate of value. The fact that a knowledgeable trader is willing to buy or sell a quantity of securities or commodities at a certain price has to be just this kind of information. This can affect other bids and offers. So prices can both clear markets and provide information.
The dual role of prices has a number of consequences. For example, a trader with a liquidity motivation needs to publicize his intentions and thus avoid a negative impact on the market. Thus, an institution buying securities for a pension fund that intends to hold only a representative cross-section of securities should make it clear that it does not view financial interventions as underpriced. On the other hand, any firm that tries to buy or sell a large number of shares that it wrongly considers to be underpriced should (and may try) to conceal its motives, its identity, or both. But such attempts can be ineffective, because the people who are asked to be on the other side of such transactions will go to great lengths to find out exactly what is going on, and many of them succeed in these days of rapid communication and access to many sources of information.
Most securities are sold in very standard ways, requiring electronic notification of payment and delivery within the standard settlement period (the standard is three Business days rather than calendar days). In rare cases, a sale may be made as a cash transaction requiring immediate payment upon receipt. Sometimes, as a reward or as a marketing or sales promotion, payment may be spread over a longer period – usually 15, 30 or 60 days.
Sometimes in the case of new issues, a payment extension period is also granted for the same reasons above.
It would be highly inadequate if every securities transaction ended with the physical delivery of actual shares from the seller to the buyer. A brokerage firm might sell 1000 shares of ABC Co. for one client. ‘s 1000 shares to another client and later the same day buy 1000 shares for Mr. Felon, taking delivery from his dealer. Mr. Stevens’ shares can be delivered to his buyer and Mr. Felon’s shares can be acquired by taking delivery from his seller.
However, it would be much easier to transfer Mr. Steven’s shares to Mr. Felon and instruct Felon’s seller to deliver 1000 shares directly to Mr. Steven’s buyer.
This would be particularly useful if the brokerage firm’s clients Mr. Felon and <r. Stevens held their securities in street name. Then, the 1000 shares they traded would not have to be physically moved and there would not even be a change of ownership in ABC Company.
As you can see, the valuation of your stock and securities portfolio is not always indicative of the true and full value of your securities. Real logistics, human emotions and even greed play important and constant roles.
