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Securities Markets


Securities Markets Security Markets The primary markets Secondary markets -- stocks Secondary markets -- bonds The Primary Market -- Two Forms of Issues Initial ... – PowerPoint PPT presentation

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Title: Securities Markets

Chapter 12
  • Securities Markets

Security Markets
  • The primary markets
  • Secondary markets -- stocks
  • Secondary markets -- bonds

The Primary Market -- Two Forms of Issues
  • Initial public offerings (IPO) -- the very first
    shares ever issued by a company.
  • Seasoned new issues -- new shares being issued by
    a company that is already publicly traded.
  • Investment bankers serve as underwriters.

Secondary Markets
  • Trade previously owned shares of stock.
  • Consist of organized exchanges and an
    over-the-counter market.

Secondary Markets The Organized Exchanges
  • Are used to facilitate trading between investors
  • New York Stock Exchange (NYSE)
  • American Stock Exchange (AMEX)
  • Regional stock exchanges

Regional Stock Exchanges
  • Pacific Stock Exchange
  • Chicago Stock Exchange
  • Philadelphia Stock Exchange
  • Cincinnati Stock Exchange
  • Intermountain Stock Exchange
  • Spokane Stock Exchange
  • Boston Stock Exchange

Make-up of the New York Stock Exchange
  • Over 200 years old
  • Limited to 1,366 seats since 1953 highest price
    of a seat was 2.6 million.
  • Over 3,000 listed companies
  • 12.3 trillion (thats 12 zeros) worth of shares
  • 80 of typical trading volume

Requirements for NYSE Listing, 1999
  • Profitability -- 2.5 million before tax earnings
  • Size -- 40.0 million net tangible assets
  • Market value -- 40.0 million publicly held stock
  • Public ownership -- 1.1 million publicly held
    common shares

Make-up of the American Stock Exchange
  • 600 seats
  • 780 firms listed
  • Trading only 3 of the volume of the NYSE.
  • Daily dollar trading less than some regional

Secondary Markets Over-the-Counter (OTC) Market
  • Consists of an electronic network of dealers used
    to execute trades

Secondary Markets Over-the-Counter (OTC) Market
  • Trades executed by
  • Pink sheets
  • National Association of Securities Dealer
    Automated Quotations System (NASDAQ)
  • National Market System (NASDAQ/NMS)
  • Handles 35,000 smaller, less frequently traded
    securities with no listing requirements

Secondary Markets -- Bonds
  • No organized secondary bond market, as little
    demand among individual investors.
  • Individual investors must work through a broker,
    who buys or sells with a bond dealer.
  • Government bond trading is dominated by
    investment houses, commercial banks, and the
    Federal Reserve.

International Markets
  • International bond market exceeds 25 trillion
  • To buy international stocks
  • NYSE, AMEX, NASDAQ trade some companies
  • Trade American depository receipts (ADRs) --
    international shares are held on deposit by
    foreign banks and the ADRs are sold to investors
    as a representative ownership of the shares
  • Invest directly through

Regulation of the Securities Markets
  • Securities and Exchange Commission (SEC)
  • Securities Act of 1933 -- requires disclosure of
    relevant information in a timely manner.
  • Securities Exchange Act of 1934 -- established
    the SEC.

Regulation of the Securities Markets (contd)
  • Investment Advisors Act of 1940 regulates
    advisor activity.
  • Investor Protection Act of 1970 -- (SIPC)
    provides investor insurance similar to FDIC bank
    deposit insurance.

  • Circuit breakers -- triggers that momentarily
    stop trading to prevent disastrous market slides.
  • Insider trading and market abuses
  • insider trading -- use of non-public information
    for personal gain in the market
  • churning -- excessive trading without benefit to
    the client used to increase commissions.

How Securities are Traded
  • Specialists
  • Buy and sell orders
  • Brokers
  • Brokerage services
  • Cash and margin accounts

Role of the Specialist in an Organized Exchange
  • To maintain order in the market. To reduce
    fluctuation, NYSE specialists represent almost
    20 of the share volume traded.
  • To track and process buy and sell orders.
  • To maintain an inventory of assigned stock.
  • To maintain bid and ask prices of their assigned

Order Characteristics
  • Order sizes
  • Time period for which the order will remain
  • Order types

Order Sizes
  • Round lots -- orders of 100 shares
  • Odd lots -- orders of 1 to 99 shares
  • Discretionary account Broker authorized to make
    trades for you. Exercise caution, or avoid.

Time Period the Order Will Remain Outstanding
  • Day orders -- good until the end of the trading
  • Open orders (GTC) -- good until filled or
  • Fill or kill orders -- must be filled or canceled

Order Types
  • Market orders -- an order to sell or buy a
    specific number of shares at the best available
  • Limit orders -- an order to sell or buy a
    specific number of shares at a certain price or

Order Types (contd)
  • Stop (or stop-loss) orders -- an order to sell a
    specific number of shares if the stock falls
    below a certain price or buy a specific number of
    shares if the stock rises above a certain price.
  • Use care to set prices to safeguard against major

Short Selling -- Sell High and Buy Low
  • An almost reverse investment strategy which
    involves selling stock you dont own and then
    buying it back later -- at a lower price.
  • Desirable when the market is expected to drop.

Short Selling -- Sell High and Buy Low (contd)
  • Must meet margin requirement.
  • Because you sold the brokers stock, you must
    repurchase the stock and you also must repay any
    dividends to the original owner.

Dealing with Brokers
  • Brokerage accounts
  • Types of brokers choosing one
  • Cash versus margin accounts
  • Registration street name or your name
  • Joint accounts
  • Brokers and individual investors
  • The cost of trading
  • On-line trading

Asset Management Account
  • Brokerage firm comprehensive financial services
  • Checking account
  • Credit card and loans
  • Money market mutual fund
  • Brokerage services

Types of Brokerage Firms
  • Full service brokers
  • Discount service brokers 50 to70 discount
  • Deep discount brokers 90 discount
  • On-line discount and deep discount brokers Low
    cost, immediate trading

Account Types
  • Cash accounts -- use your money to pay for the
    purchase in-full within 3 business days
  • Margin accounts -- use the brokerage firms money
    to purchase part of the stock. This can amplify
    both gains and losses.
  • Maintenance margin
  • Margin call

Account Types (contd)
  • Automated Clearing House (ACH) Network --
    electronic payment system among 14,000 financial
    institutions that can be linked to your brokerage
    firm. Cheap, convenient, fast payment.

Accounts Types (contd)
  • Street name registration -- shares of stock
    remain in the brokers custody. May be charged
    maintenance fee for dormant accounts.
  • Joint accounts -- shares owned with a spouse or
  • Joint tenancy with the right of survivorship
  • Tenancy-in-common

Working With a Broker
  • Remember Axiom 12 The Agency Problem in
    Personal Finance.
  • Do your homework and take responsibility.
  • Keep transaction costs to a minimum.
  • Use a discount broker or consider mutual funds.
  • For bonds, go full service or buy direct.

Choosing a Broker
  • Integrity, intelligence, and efficiency
  • Experience in both up- and down-markets
  • Someone who understands your investment
  • Reputation for allowing customers to say no
    without undue pressure
  • Up front regarding costs and commissions

The Cost of Trading
  • Commissions
  • Transaction fees
  • Inactive account fees
  • Annual fees
  • Maintenance fees

On-line Trading
  • Cheap, easy trading, but do your investment
  • For fast moving stocks, use limit orders not
    market orders.

On-line Trading (contd)
  • Make sure all cancellations were processed.
  • If your account falls below the maintenance
    margin requirement, your securities can be sold
    without a margin call.
  • No regulations govern the time for executing a

Day-trading Cautions
  • Be prepared for financial losses.
  • Dont confuse day trading with investing its
  • Dont believe claims of easy profits.
  • Watch out for hot tips and expert advice for
    day traders.

Sources of Investment Information
  • Corporate sources of information
  • Brokerage firm reports
  • The press
  • The Wall Street Journal
  • Magazines
  • Investment publications
  • Internet sources
  • Investment clubs

  • Primary securities markets
  • Initial public offerings
  • Seasoned new issues
  • Secondary securities markets
  • New York Stock Exchange
  • American Stock Exchanges
  • Regional Exchanges
  • Over-the-counter markets

Summary (contd)
  • Securities market regulation
  • Order size, duration, and type
  • Round lots and odd lots
  • Day, GTC, or fill-or-kill orders
  • Market, limit, and stop orders
  • Cash or margin accounts

Summary (contd)
  • Types of brokerage firms, services, and fees
  • Work with a broker or trade on-line?
  • Day trading cautions
  • Sources of investment information