Advanced Stock Market Structure and Trading Mechanics

In the main video, we became familiar with the concept of a share, primary and secondary markets, exchanges and brokers, the New York and London stock markets, the main types of shares, market capitalization, dividends, indices, long and short transactions, margin, and stock market risks.

This video is optional supplementary training. Our goal is to deepen your understanding of the structure of the stock market and introduce you to details that give you a more professional understanding of buying, selling, and holding shares.

In this video, we will discuss stock ownership structures, initial public offerings, exchange-traded instruments, the order book and order types, settlement, corporate actions, share ownership, costs, legal protections, and broker selection.

The purpose of this video is not to select a stock or build a strategy. Its purpose is to give you a more accurate understanding of the market in which you are going to operate.

In the main video, we said that when a company issues shares, it divides its ownership into smaller units. Now, let us examine this concept through a simpler example.

Assume that a hypothetical company called Hudson Robotics Incorporated is founded in New York, and its founders initially own the entire company. The company decides to divide its ownership into 100 million shares. Dividing the company into 100 million shares does not mean that the company is worth $100 million. The number of shares alone does not determine the company's value. If this company has 100 million shares outstanding, and each share is priced at $20 in the market, the company's market capitalization becomes $20 multiplied by 100 million shares. That equals $2 billion. This figure is called market capitalization.

In the simplest case, your ownership percentage equals the number of shares you own divided by the total shares outstanding, multiplied by 100. For example, if you own 10,000 shares in a company with 100 million shares outstanding, you own approximately 0.01% of that company.

However, there is an important point. Economic ownership percentage and voting power percentage are not always exactly the same. Some companies have multiple share classes. They may have Class A and Class B shares. These classes may differ in voting rights, dividends, transferability, or convertibility. For example, one share in one class may have one vote, while a share in another class may have several votes. Therefore, if a company has multiple tickers or multiple share classes, you should separately examine the rights associated with each class before buying.

To understand a company's share structure, we need to distinguish several terms from one another. Authorized shares are the maximum number of shares that a company is permitted to issue under its legal documents. Being authorized does not mean that all of those shares have been issued. Issued shares are the shares that the company has actually issued. Shares outstanding are issued shares that are held by shareholders. Treasury shares are shares that the company has repurchased after issuing them, and now holds itself. And free float is the portion of shares that is practically available for public trading in the market. A low free float can reduce liquidity and increase the sensitivity of the price to large orders.

A private company is a company whose shares are not available for public traders on a public exchange. Ownership of this company may belong to founders, employees, families, private equity funds, or venture capital investors. The transfer of private shares is usually more restricted, more complex, and less liquid. There is also not necessarily a transparent, real-time price for them.

A public company, however, is a company whose shares are offered to public investors or traded in a public market under the relevant legal framework. A public company is generally required to disclose specified information periodically or when important events occur. For example, financial statements, management reports, risks, major changes, and information required by shareholders. Of course, public company, listed company, and traded company do not always have exactly the same legal meaning in every country.

An IPO, or initial public offering, is the first registered offering of a company's shares to the public. When a private company wants to become public, its management and shareholders examine whether the benefits of access to public capital outweigh the costs, disclosure requirements, and pressures of being a public company.

The company usually works with investment banks, lawyers, auditors, brokers, financial advisors, and investor relations specialists. The company's financial, legal, operational condition and risks are reviewed. Then disclosure documents, financial statements, and information relating to the company are prepared.

In the United States, a company conducting an IPO generally files a registration statement and a prospectus. However, a regulator's review of these documents does not mean that it approves the investment quality or guarantees the completeness of all the company's claims.

At the next stage, the company and the underwriters assess the potential demand from investors. In a process called book building, institutional investors' orders or indications of interest are collected to determine the offering range and price. Not all applicants necessarily receive the full number of shares they requested. The allocation method depends on the offering structure and market regulations.

After the required steps are completed, the share is admitted to the market under a trading symbol, and secondary market trading begins. The IPO offering price is not necessarily the same as the first price or later prices in the secondary market. Supply and demand in the secondary market can push the price higher or lower. An IPO is not the only way to enter the public market either. A company may enter the public market through other routes, such as a direct listing, a merger with a SPAC, or other legal methods.

Not everything displayed on a stock trading screen is necessarily a common share. An ETF, or exchange-traded fund, is a fund whose units trade on an exchange like shares. When you buy an ETF, you own units of that fund. You are not directly buying and registering each individual share held inside the fund in your own name.

An investment trust in the United Kingdom is a closed-end investment company whose shares are traded on an exchange. Its market price can differ from its net asset value.

A REIT, or real estate investment trust, is a structure for investing in real estate or income related to it. This instrument may trade on an exchange, but it has its own tax characteristics and income distribution rules.

ADRs and GDRs are types of depositary receipts that represent a specified number of shares in a foreign company. For example, a British company may become available to investors in the United States through an ADR. An ADR buyer does not directly hold the same domestic London share line. The depositary bank and the conversion ratio also play a role in its structure.

Rights, warrants, and options can also be connected to shares, but they are not common shares themselves. These instruments may have expiration dates, exercise prices, leverage, and different rights.

Tokenized shares are another subject. A token that claims to track the price of a share is not necessarily the legal share itself. The holder's rights depend on the issuer, custodian, contract, and applicable regulations. Similarity in the price chart does not mean that the nature of the instruments is the same.

The U.S. stock market is not limited to the New York Stock Exchange. Nasdaq, NYSE Arca, NYSE American, regional exchanges, market makers, ATSs, and many other execution venues also operate in this market. NYSE is one of the main U.S. exchanges and uses a combination of electronic technology and a physical trading floor. For every share primarily listed on NYSE, a designated market maker, or DMM, is assigned. The DMM helps maintain a fair and orderly market and plays a role in price discovery, especially at the opening, closing, or during order imbalances. A broker may send an order for a NYSE-listed share to NYSE itself, another exchange, or a market maker. Therefore, buying a share in the U.S. market does not always mean that the order is executed only on the primary exchange.

The London Stock Exchange is not simply one single list of companies either. It has various markets and trading services. The Main Market is the principal London Stock Exchange market for larger, more established, and international companies. AIM is also a market for smaller and medium-sized growth companies. Admission to AIM does not mean that a company is risk-free or that its quality is guaranteed. Smaller companies may have lower liquidity, higher volatility, and greater business risk. SETS is the London Stock Exchange's main electronic order book, and many large shares, ETFs, and actively traded securities are

...traded through it. For some less liquid securities, the London Stock Exchange uses models such as SETSqx and SEAQ. One practical point is that many London shares are displayed in GBX or pence, rather than full GBP. For example, a price of 250 GBX equals £2.50.

Assume that you intend to buy 100 shares in a company listed on NYSE. First, you enter your brokerage account. You select the stock's ticker symbol. You determine the number of shares and the order type. The broker checks the credit, available balance, and whether the order is permitted. Then it sends the order to the appropriate execution venue. The order is matched with an opposing order or market maker liquidity. The trade is executed and reported to you. After the trade, the clearing and settlement process also takes place. Pressing the Buy button does not mean that you are directly connected to the exchange trading floor. The order first reaches the broker, and its execution can take place through different routes.

Bid is the highest price at which a buyer is willing to pay for a share at that moment. Ask, or offer, is the lowest price at which a seller is willing to sell the share. The difference between the best ask and the best bid is called the spread. For example, if the best bid price is $49.98 and the best ask price is $50.02, the spread equals 50.02 minus 49.98, that is $0.04. For an immediate purchase, you usually interact with liquidity on the ask side. For an immediate sale, you usually interact with liquidity on the bid side. Last price is simply the price of the most recent completed trade. The current prices offered by buyers or sellers may differ from the last price. The last price is not necessarily the price at which you can buy or sell right now.

At each price level, different quantities of shares may be available for buying and selling. The total of these orders forms market depth. Assume that only 100 shares are available for sale at $50.02, but you place an order to buy 1,000 shares. The first 100 shares may be executed at $50.02, while the rest of the order may be executed at higher prices. The difference between the expected price and the average actual execution price is a type of slippage. Therefore, liquidity does not simply mean that there is eventually a buyer or seller. A share is more liquid when the spread is narrow, suitable volume exists at different price levels, a large order creates less price impact, and trading takes place continuously.

A market order is sent for immediate execution at the best available prices. This order increases the likelihood of execution, but it does not guarantee the exact price. In an illiquid share or a volatile market, the execution result of a market order may be far from the price you saw on the screen. With a limit order, you specify the maximum buying price or the minimum selling price. A buy limit is executed only at the specified price or lower. A sell limit is executed only at the specified price or higher. Therefore, with a limit order, the price is controlled. However, order execution is not guaranteed.

When the price reaches the stop price, a stop order usually becomes a market order. For this reason, the stop price is not necessarily the guaranteed execution price of the order. With a stop-limit order, when the price reaches the stop level, a limit order becomes active. This structure limits the price, but during a fast market movement, the order may not be executed at all. Some brokers also offer orders for opening and closing auctions, such as market-on-open, limit-on-open, market-on-close, and limit-on-close. Order time conditions are also important. Day means that the order remains valid only until the end of that trading day. GTC means that the order remains active until it is cancelled or until the broker's expiry date. IOC means that the executable portion is completed immediately and the remainder is cancelled. And FOK means that the entire order must be executed immediately; otherwise, it will be cancelled.

When the market is closed, news and orders accumulate. The opening auction attempts to find a price that executes the greatest possible matched volume while taking market rules into account. For this reason, the opening price can differ from the previous day's closing price. This difference is called a price gap. After the market opens, continuous trading begins. In continuous trading, orders are matched according to market-priority rules. In many markets, the common logic is that the better price has priority first, and then, among orders at the same price, the order that arrived earlier usually has higher priority. At the end of the day, the closing auction determines the official closing price. This price is highly important for fund valuation, index calculations, performance reporting, and the execution of certain orders.

Volume is the number of shares traded during a specified period. High volume can be a sign of high activity, but it is not bullish or bearish on its own. Every trade has both a buyer and a seller. Trading value is the monetary value of the shares traded. Its formula is as follows: trading value equals the number of shares traded multiplied by the transaction price. Turnover can also refer to the ratio of trading volume or trading value to free-float shares or market capitalization. You should check the exact definition of turnover from the data source. $1,000,000 $1 shares are not the same in monetary value as $1,000,000 $500 shares. Therefore, for comparison, you should examine both trading volume and trading value, as well as the liquidity of the order book.

Trade execution and trade settlement are not the same thing. Trade date, or T, is the day on which the trade is agreed and executed. Settlement date is the day on which the final transfer of money and securities takes place under the standard cycle. After a trade is executed, its details are usually recorded and confirmed. The obligations of the parties are calculated, counterparty risk is managed, funds are transferred, and the transfer or registration of securities ownership is completed. Clearing relates to the calculation, matching, and management of obligations. Settlement is the final completion of the transfer of money and securities.

From May 28th, 2024, the standard settlement cycle for most US securities transactions was shortened from T+2 to T+1. This means that a trade completed on Monday will normally settle on Tuesday, provided that it is a business day. As of the date of this research, the general UK standard for most relevant transactions is T+2. The UK government has committed to making T+1 the legal standard from October 11th, 2027. However, the final details may change before regulations are approved. A shorter settlement cycle can reduce counterparty risk, liquidity demands, and the time during which obligations remain open. However, it requires faster preparation of funds, currency, reconciliation, and back-office operations. Also, seeing proceeds from a sale in your account does not necessarily mean final settlement or immediate withdrawal availability. The withdrawal policy, broker rules, settlement cycle, and account status are important.

A registered owner is an individual or institution whose name is directly recorded in the company's records or with the transfer agent. A beneficial owner receives the economic benefits of a share, but the share may be held in official records in the name of a broker or intermediary institution. In the United States, this method is called street name. In this case, you can still have economic rights and voting instructions, but the process takes place through an intermediary. A custodian is a bank or institution that holds assets on behalf of a client or fund and manages operational matters such as settlement, dividend collection, and corporate actions. Transfer agents and registrars also manage records of registered shareholders, ownership transfers, dividends, and certain shareholder communications.

A fractional share allows you to buy less than one full share. For example, if a share has a high price, a broker may allow you to buy a portion of it instead of purchasing one full share. This feature is often created by the broker itself. For this reason, there may be restrictions concerning transfer to another broker, voting rights, liquidity, or order execution. Therefore, if you use fractional shares, you should examine exactly what type of ownership you have, whether it can be transferred, and how the related dividend or voting rights are applied.

The price changes when new trades take place at different prices. If buyers accept existing sell orders at higher prices in order to execute immediately, the price rises. If sellers accept existing buy orders at lower prices in order to exit immediately, the price falls. However, the reasons behind the decisions of buyers and sellers can be very diverse: company revenue and earnings, management forecasts, product launches, management changes, mergers and acquisitions...

interest rates, inflation, economic growth, exchange rates, commodity prices, regulatory changes, political tensions, fund capital flows, sentiment and expectations, algorithmic trading, and changes in liquidity.

One very important point is that price does not react only to whether a company is good or bad. Price reacts to the difference between reality or new information and the market's previous expectations.

A company may release a strong earnings report, but because the market expected a much better report, the share price may fall. On the other hand, a weak report may be released, but if the result is better than market expectations, the share price may rise.

Therefore, to understand a price movement, the news itself is not enough. You need to see what the market expected before the news was released and what difference the new information created compared with that expectation.

A good company and a share that is suitable to buy do not always mean the same thing.

In the main video, we said that the price of one share alone does not show the value of a company. Market capitalization, book value, enterprise value, and intrinsic value are different concepts.

Book value is obtained from accounting information based on the difference between assets and liabilities. Market capitalization can be much higher or lower than book value.

There are also several basic ratios used as a starting point for examining companies.

EPS, or earnings per share, equals profit attributable to common shares divided by the weighted average number of shares.

The price-to-earnings ratio, or P/E, equals the share price divided by EPS.

Dividend yield equals the annual cash dividend per share divided by the share price, multiplied by 100.

However, these ratios are only the starting point of analysis. Debt, growth, earnings quality, industry, and economic cycle conditions can change how they should be interpreted.

When a company repurchases its own shares, the number of shares outstanding may decrease. If all other factors remain unchanged, each remaining shareholder's share of the company increases. However, share buybacks do not always create value.

The purchase price, source of funding, the company's debt, management incentives, and the simultaneous issuance of new shares all matter.

There are also several important dates related to dividends. Declaration date is the date on which the dividend is announced. Ex-dividend date is the date without the dividend. Record date is the date on which eligible ownership is recorded. And payment date is the date of payment.

If you buy a share on or after the ex-dividend date, you usually will not receive the next declared dividend, and the previous seller will receive it.

In the main video, we said that dividends are not free money. On the ex-dividend date, the share price may be adjusted in proportion to the distribution amount, although other market factors can also affect the price at the same time.

Therefore, buying a share only to receive a dividend, without considering the price adjustment, taxes, and market risk, does not create profit without cost.

Some investors use a dividend reinvestment plan, or DRIP. In this method, cash dividends are used again to purchase shares. However, you should examine the terms, costs, and availability of fractional ownership.

Corporate actions are events that affect shares or shareholder rights. A stock split increases the number of shares and reduces the theoretical price of each share proportionally.

For example, in a 2-for-1 split, before the split, you own 100 shares priced at $100. The total value of your ownership is $10,000. After the split, you own 200 shares with a theoretical price of $50. The total value of your ownership is still $10,000. A stock split does not create wealth by itself.

In a reverse split, or share consolidation, the number of shares decreases, and the theoretical price of each share increases.

For example, in a 1-for-10 reverse split, before the consolidation, you own 1,000 shares priced at $1. After the consolidation, you own 100 shares with a theoretical price of $10. A share consolidation also does not automatically increase economic value and is sometimes carried out to raise the nominal share price or meet listing requirements.

In a rights issue, a company gives existing shareholders the right to buy new shares under specified conditions. If a shareholder does not use this right, their ownership percentage may decrease.

If a company issues new shares, the relative share of previous owners may also decline. This effect is called dilution. However, issuing new shares is not necessarily bad. You should examine what the new capital will be used for, what the issue price is, and whether that capital can create greater economic value.

In a merger or company acquisition, a shareholder may receive cash, shares in the acquiring company, or a combination of both. In a spin-off, part of a business becomes an independent company, and its shares may be distributed among the parent company shareholders.

These types of corporate actions can change the ownership structure, number of shares, shareholder rights, and even the tradable ticker symbols. For this reason, if a share you own enters an important corporate event, you should review the company's official information and your own broker's information.

In the main video, we became familiar with important indices such as the S&P 500 and the FTSE 100. However, indices use different weighting methods.

In the free-float adjusted market capitalization method, a company's weight is determined by the value of shares that are actually available for public trading.

In an equal-weighted method, each company receives the same weight.

In a price-weighted method, a share with a higher nominal price has a greater effect on the index.

And in a fundamental or factor-weighted method, weight can be determined based on earnings, sales, dividends, volatility, or other measures.

For example, the S&P 500 is weighted based on free-float adjusted market capitalization. However, the Dow Jones Industrial Average is a price-weighted index.

A price return index reflects only price changes. However, a total return index also considers the effect of reinvesting dividends.

Therefore, if you compare two indices or two charts, you need to know which one shows only price change and which one calculates total return. Comparing price return and total return without considering the difference in their methods can produce an incorrect conclusion.

Also remember that an index itself is not a company or a share. To follow the performance of an index, instruments such as funds, ETFs, futures contracts, options, CFDs, or other instruments are used, and each has its own structure and risks.

Sometimes, trading in a share may be temporarily halted. This can happen because of important news, pending disclosure, unusual volatility, a technical issue, or a regulatory review.

In the United States, there are also market-wide circuit breakers that can temporarily halt trading in the entire market during severe declines in major indices.

The purpose of these halts is not to eliminate market risk or guarantee the prevention of losses. Their purpose is to create time to evaluate conditions, reduce disorder, and help restore order to the market.

At the London Stock Exchange, volatility control mechanisms and periodic auctions can also affect how trading takes place under certain circumstances.

A zero commission does not mean that trading is free. The costs of operating in the stock market can include broker commissions, spread, slippage, currency conversion, account maintenance fees, market data fees, share transfer fees, withdrawal fees, margin interest, stock borrow fees for short positions, and taxes or levies.

For investing in international shares, the exchange rate is also highly important. A share price may rise in its local currency, but a decline in that currency's value relative to your account currency may eliminate part of the return.

Therefore, an international investor's final return does not depend only on the share price chart. It also depends on the exchange rate, conversion costs, and taxes.

Some countries have schemes that, under specified conditions, protect client assets in the event of broker insolvency or an asset shortfall.

For example, SIPC in the United States may help restore cash and securities up to legal limits if a member broker becomes insolvent and customer assets are missing. Its general limit is up to $500,000 for securities and cash, of which a maximum of $250,000 may relate to cash.

In the United Kingdom, the FSCS may provide protection of up to £85,000 per person per institution for eligible individuals and activities if a provider becomes insolvent or there is an asset shortfall.

However, these protections depend on whether the institution is authorized, the type of service, and the conditions of the claim. These protections do not compensate for losses resulting from a fall in share prices, poor market performance, or an incorrect trading decision.

The stock market is not free from fraud,

fraud or abuse, but regulations, reporting, and supervision exist to reduce these behaviors.

Examples of market abuse can include trading based on insider information, unlawful disclosure of confidential information, placing misleading orders or trades, spreading false rumors, pump and dump schemes, spoofing, and manipulation of the closing price.

Spoofing means placing orders without a genuine intention to execute them in order to mislead others about supply or demand.

However, remember one important point. The size and regulation of a market do not reduce the possibility of misconduct to zero. On the other hand, severe volatility or a price movement against your analysis is not, by itself, proof of manipulation.

Unlike crypto, shares are not traded around the clock. News outside regular trading hours can create a price gap at the next opening.

Pre-market and after-hours trading may be available, but they usually involve fewer participants, wider spreads, lower depth, and more slippage.

Corporate actions such as splits, cash dividends, and certain other events can disrupt historical price comparisons.

Adjusted price adjusts price history for certain events so that return analysis or the chart becomes more continuous.

However, not all data providers use the same adjustment method.

If a chart has not been adjusted for a split, an apparent sharp decline may simply be the result of that split rather than an economic collapse in the company.

A broker is not merely a beautiful application. Choosing a broker is part of your risk management.

You should examine exactly which legal entity you are contracting with, and which regulator supervises it.

You should determine whether the product being offered is a real share, a fractional share, a CFD, or another instrument.

Review the method of client-asset segregation, the custodian, the place of custody, and any possible protection scheme.

Check which markets the broker provides access to.

See the full cost, not only the commission. Spread, currency conversion, custody, data, withdrawals, transfers, and taxes can also be important.

Execution speed, price improvement, execution rates, order execution venues, and the best execution policy are also important.

Not all brokers offer stop-limit orders, auction orders, trailing stops, or trading outside regular hours. Check which order types are available to you.

Check whether your shares can be transferred to another broker or whether they must only be sold. This issue is even more important for fractional shares.

You should know whether the prices you see are real-time, delayed, or only coming from a limited execution venue.

Two-factor authentication, login alerts, withdrawal controls, operational history, and support quality are also important.

Technical access to the stock market has become easier, but this does not mean that you are academically prepared to trade.

Before placing any order, you should know which instrument you are trading, in which market, at what cost, and under which conditions.

In this supplementary training, we saw that the stock market is not merely a price chart and buy and sell buttons.

Behind every share, there is an ownership structure, shareholder rights, share issuance, an exchange, a broker, an order book, clearing, settlement, and asset custody.

We saw that not every exchange-traded instrument is necessarily a common share.

We saw that the price of a single share alone does not determine the value of a company and that share structure, market cap, valuation, and the company's conditions must also be considered.

We saw that dividends, splits, dilution, corporate actions, and exchange rates can affect an investor's actual result.

And we saw that broker selection, order type, costs, liquidity, settlement conditions, and account security are part of informed activity in the stock market.

The more you understand the market structure and the instrument you are trading, the more informed and professional your decisions will be.