(This post is a part of the series on Basics of Finance and Investing.)

In simple terms, a market is where buyers and sellers meet to exchange goods for money. This basic concept still works in the sophisticated world of finance, except that there are now four organizational levels depending on the nature and volume of transactions.

Direct search market

This is where buyers and sellers seek each other out. If you want to sell your TV, you put out an ad in the local newspaper or on Internet (such as craigslist). A buyer looking for a similar TV contacts you from this ad, and you two carry out the trade quick and easy. Because of the intermittency and small scale of such transactions, there is no earning opportunity for an intermediary by offering specialized services to the buyer and/or seller.

Brokered market

This is the next level in market organization. Whenever a good is traded in high volume, an intermediary evolves to offer its services for a fee. For example, in real estate market both the seller and buyer of homes often enroll a real estate broker to do the necessary searches.

Another example, relevant to this series, is a primary market, where new issues of company securities (stocks and bonds) are sold to the public. In such a market, the investment bankers act as brokers between the issuing firm and investors.

Dealer market

A dealer market arises when the trading volume for a good increases substantially. Dealers purchase the item for their own inventory, and then sell it to buyers. The “bid-asked spread” - difference between the price a dealer pays to buy the good (bid) and sells it for (ask) - is his profit.

An over-the-counter securities market, where already issued securities are traded between investors via the dealer, is an example of a dealer market. Because no new security is issued, this is also an example of a secondary market.

Auction market

This is the highest level of market organization. In an auction market, buyers and sellers get together under one roof. Both parties have several trading choices available to them in the same place, which eliminates the need for a dealer inventory and saves the bid-asked spread. A well-known example is the New York Stock Exchange (NYSE), where investors trade securities among themselves. So, stock exchanges are also secondary markets.

Because such auctions occur continuously, the corporations must carry out frequent and high volume trading to meet the cost of running the exchange. For this reason, NYSE and other such organizations have set up listing requirements for the firms to participate in them.