Understanding Third-Party Sales: An Essential Guide For Securities Trading

by

A third-party sale involves a buyer, seller, and intermediary. It differs from direct sales as the intermediary facilitates the transaction, such as a broker-dealer in an auction or public offering, a market maker in over-the-counter markets, or a customer or affiliate in private transactions. Understanding third-party sales is crucial for informed decision-making in securities trading, as they enable the distribution and exchange of securities in various markets.

Understanding Third-Party Sales in the Securities Market

In the dynamic world of finance, transactions often involve more than just a buyer and seller. Enter third-party sales, where an intermediary plays a crucial role in facilitating the exchange of securities. These sales differ from direct sales, where buyers and sellers interact directly without an intermediary.

Third-party sales involve a buyer, seller, and an intermediary, such as a broker-dealer, market maker, or other financial institution. This intermediary acts as a bridge between the parties, providing valuable services that ensure smooth and efficient transactions.

Types of Third-Party Sales

Sale via Broker-Dealer at Auction or Public Offering

When a company wants to raise capital by selling new securities, it often engages an investment bank to underwrite the offering. The investment bank evaluates the company's financial health and sets a price for the shares. The bank then offers the shares to broker-dealers who purchase them for resale to retail and institutional investors. This process ensures that the company raises the desired amount of capital while minimizing its own risk.

The secondary market plays a crucial role in the trading of securities after their initial offering. Broker-dealers act as intermediaries, matching buyers and sellers in the over-the-counter market. They make money by charging a bid-ask spread on each transaction.

Sale via Market Maker

Market makers are specialized broker-dealers who maintain an inventory of specific securities. They stand ready to buy and sell these securities at any time, facilitating liquidity in the market. Market makers generate profit by exploiting the difference between the bid price (the price at which they are willing to buy) and the ask price (the price at which they are willing to sell).

Sale to or from Customer

Retail investors are individuals who purchase securities for their own portfolios. They are typically less sophisticated and have lower investment amounts compared to institutional investors such as pension funds and mutual funds. Retail investors' motivations and investment strategies vary widely, depending on their financial goals and risk tolerance.

Sale to or from Affiliate

Insider trading refers to the illegal practice of trading securities based on material nonpublic information. Affiliates of a company, such as officers, directors, and employees, are subject to strict regulations to prevent insider trading. This is due to the potential for conflict of interest and the unfair advantage that insiders may obtain over other market participants.

Sale to or from Foreign Person

Cross-border transactions involve the sale of securities between individuals or firms in different countries. International finance plays a significant role in facilitating these transactions. Market participants must understand the impact of foreign exchange rates on their investments, as currency fluctuations can affect both returns and risk levels.

Related Topics: