What does internalization mean?

When a business handles a transaction instead of sending it to someone else, it is called “internalization.”

All types of businesses use internalization, even multinational corporations. The same goes for brokerages and investment companies. Sometimes, people use internalization to decide not to pay someone else to fix something, like when they decide to fix their device.

How to Understand Internalization

Internalization is when a person or business handles a problem instead of hiring a third party.

Companies may “internalize” the production of a specific material so their workers will do the work instead of sending it to another manufacturer.

Regarding shipping goods, a business may decide it’s more cost- or time-effective to handle the distribution through its channels rather than hiring an outside shipping company.

A global company can also use internalization. It occurs when a company moves assets between its businesses in different countries.

Good and Bad Points

Generally, when a company spends less on outsourcing, internalization can benefit it. Sometimes, it’s not good for the business when doing the job costs more than planned.

For instance, companies may need to buy extra resources and buildings to handle processes independently without warning. They may need to hire more people than they initially thought. They might also have to spend more than they thought to train more people for a specific job.

A company might think twice about taking on jobs that it doesn’t know how to do and that its workers aren’t trained to do. Internalization might not be worth it if the company doesn’t have the right skills, facilities, tools, or machines.

Trading within a company

If you tell your broker about an order, the broker may send it to a market maker to be met. It might also send it to an electronic communications network (ECN). Otherwise, it might decide to fill the order if it already has the stocks it needs.

Some examples

When a client tells their broker that they want to buy certain shares of stock, the broker has to find those shares. Internalization is the process of filling an investor’s order with shares that are already in the broker’s inventory.

This type of trading is usually cheaper than the others because the company doesn’t have to work with an outside company to finish the deal.

Brokerage companies that handle their stock orders can also make money from the spread, which is the difference between how much they pay for shares and how much they sell them.

Additionally, since these sales don’t happen on the open market, the brokerage company has less power to change prices if it sells many of its shares.

Using Your Sources

When a business gets an asset, service, or resource it needs from within the company instead of from outside, this is called “internal sourcing.” This usually means a company has decided to make its own things instead of hiring an outside supplier.

Some examples

Internal sourcing can also mean the hiring process in which present employees are given first choice when a job opens up. Keeping some business activities inside the business system, like marketing, is another part.

A company may also try to keep the source of its money a secret. For instance, it might focus on returning some of its assets to the business instead of borrowing money or finding new partners.

Does a brokerage always trade on its own?

No, because it has more than one way to fill trade orders, and it has a responsibility to get its customers the best execution that is reasonably possible. However, it may decide to internalize if it is best to fill an order with stocks it already has in stock. This will save money on an outside execution and make money on the spread.

What’s a good thing about internalization?

Getting savings is one advantage. If a company can make a product or finish a job for less money by doing it instead of hiring someone else, then internalization is a good idea.

What’s the difference between internalization and internal sourcing?

It’s just a type of internalization, which means that a company gets resources inside the company instead of looking outside. In a broad sense, it uses its workers, materials, departments, or divisions to finish a job instead of paying someone outside the company to do it.

Conclusion

• It is called “internalization” when a business handles transactions or tasks instead of hiring someone else.
• When a brokerage fills an order to buy securities like stocks using the company’s stock, this is called “internalization.”
• When a company handles a job or transaction instead of hiring a third party, it is called “internalization.”
• When a company gives assets to a subsidiary that needs them, this is called multinational internalization.
• One good thing about internalization is that it cuts costs.