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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.

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Chapter 12

Chapter 12

Securities Markets

Security markets
Security Markets

  • The primary markets

  • Secondary markets -- stocks

  • Secondary markets -- bonds

The primary market two forms of issues
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
Secondary Markets

  • Trade previously owned shares of stock.

  • Consist of organized exchanges and an over-the-counter market.

Secondary markets the organized exchanges
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
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
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 (that’s 12 zeros) worth of shares

  • 80% of typical trading volume

Requirements for nyse listing 1999
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
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 exchanges.

Secondary markets over the counter otc market
Secondary Markets: Over-the-Counter (OTC) Market

  • Consists of an electronic network of dealers used to execute trades

Secondary markets over the counter otc market1
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
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 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
Regulation of the Securities Markets

  • Securities and Exchange Commission (SEC) regulation.

  • 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 cont d
Regulation of the Securities Markets (cont’d)

  • Investment Advisors Act of 1940 – regulates advisor activity.

  • Investor Protection Act of 1970 -- (SIPC) provides investor insurance similar to FDIC bank deposit insurance.

Self regulation

  • “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
How Securities are Traded

  • Specialists

  • Buy and sell orders

  • Brokers

  • Brokerage services

  • Cash and margin accounts

Role of the specialist in an organized exchange
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 stock.

Order characteristics
Order Characteristics

  • Order sizes

  • Time period for which the order will remain outstanding

  • Order types

Order sizes
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
Time Period the Order Will Remain Outstanding

  • Day orders -- good until the end of the trading day.

  • Open orders (GTC) -- good until filled or canceled.

  • Fill or kill orders -- must be filled or canceled immediately.

Order types
Order Types

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

  • Limit orders -- an order to sell or buy a specific number of shares at a certain price or better.

Order types cont d
Order Types (cont’d)

  • 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 fluctuations.

Short selling sell high and buy low
Short Selling -- Sell High and Buy Low

  • An almost reverse investment strategy which involves selling stock you don’t 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 cont d
Short Selling -- Sell High and Buy Low (cont’d)

  • Must meet margin requirement.

  • Because you sold the broker’s stock, you must repurchase the stock and you also must repay any dividends to the original owner.

Dealing with brokers
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
Asset Management Account

  • Brokerage firm comprehensive financial services package:

  • Checking account

  • Credit card and loans

  • Money market mutual fund

  • Brokerage services

Types of brokerage firms
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
Account Types

  • Cash accounts -- use your money to pay for the purchase in-full within 3 business days

  • Margin accounts -- use the brokerage firm’s money to purchase part of the stock. This can amplify both gains and losses.

    • Maintenance margin

    • Margin call

Account types cont d
Account Types (cont’d)

  • 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 cont d
Accounts Types (cont’d)

  • Street name registration -- shares of stock remain in the broker’s custody. May be charged “maintenance fee” for dormant accounts.

  • Joint accounts -- shares owned with a spouse or partner

    • Joint tenancy with the right of survivorship

    • Tenancy-in-common

Working with a broker
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
Choosing a Broker

  • Integrity, intelligence, and efficiency

  • Experience in both up- and down-markets

  • Someone who understands your investment philosophy

  • Reputation for allowing customers to say no without undue pressure

  • Up front regarding costs and commissions

The cost of trading
The Cost of Trading

  • Commissions

  • Transaction fees

  • Inactive account fees

  • Annual fees

  • Maintenance fees

On line trading
On-line Trading

  • Cheap, easy trading, but do your investment homework.

  • For fast moving stocks, use limit orders not market orders.

On line trading cont d
On-line Trading (cont’d)

  • 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 trade.

Day trading cautions
Day-trading Cautions

  • Be prepared for financial losses.

  • Don’t confuse day trading with investing – it’s speculating.

  • Don’t believe claims of easy profits.

  • Watch out for “hot tips” and “expert advice” for day traders.

Sources of investment information
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 cont d
Summary (cont’d)

  • 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 cont d1
Summary (cont’d)

  • Types of brokerage firms, services, and fees

  • Work with a broker or trade on-line?

  • Day trading cautions

  • Sources of investment information