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Chapter 18. COMMON STOCK MARKETS IN THE UNITED STATES. Characteristics of Common Stock. Equity securities represent an ownership interest in a corporation. Common stockholders are the residual owners. Right to income Right to assets

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chapter 18

Chapter 18


characteristics of common stock
Characteristics of Common Stock
  • Equity securities represent an ownership interest in a corporation.
  • Common stockholders are the residual owners.
    • Right to income
    • Right to assets
  • Preferred Stockholders have preference over common stockholders.
    • Right to fixed dividend
trading locations
Trading Locations
  • Stock Exchanges
    • trading floors
    • auction system
    • central auction specialist system
  • Over-The-Counter Market
    • no trading floor
    • negotiated system
    • multiple market maker system
  • Independent Electronic Trading Systems
stock exchanges
Major National Stock Exchanges

NYSE or Big Board

AMEX or ASE or Curb

Regional Stock Exchanges

Boston, Chicago, Cincinnati, San Francisco, Philadelphia

OTC Market



Stock Exchanges
securities act of 1934
Securities Act of 1934
  • Categories of traded stocks:
    • exchange listed (national and regional exchanges)
    • NASDAQ listed OTC stocks
    • Non-NASDAQ OTC stocks
types of markets
Types of Markets
  • First Market
    • trading on exchanges of stocks listed on an exchange
  • Second Market
    • trading in OTC market of stocks not listed on an exchange
  • Third Market
    • trading in OTC market of stocks listed on an exchange
  • Fourth Market
    • private transactions between institutional investors
  • Formal organizations approved and regulated by the SEC
  • Members
    • can only trade listed stocks
    • must buy a seat on the exchange
  • Listing requirements
    • minimum capitalization, shareholder equity, average closing share price, etc.
Centralized continuous auction market

Exchange participants:

single specialist

commission brokers

independent floor brokers

registered traders


Major roles of NYSE-specialist






otc market
Trading unlisted stocks

Listing requirements

NASDAQ stock market

NASDAQ market tiers

NASDAQ National Market

Small Capitalization Market

NASDAQ market makers

Other OTC markets

OTC Bulletin Board

Pink Sheets

OTC Market
third market
Third Market
  • Listed stocks traded in OTC market
  • NYSE Rule 390
  • Commission
  • Network of broker-dealers
fourth market
Fourth Market
  • Direct trading of stocks between two customers
  • Commissions
  • Alternative trading systems (ATS)
    • electronic communications networks
    • crossing networks
other types of common stock trading
Other Types of Common Stock Trading
  • Offshore Trading
  • Rule 144A Securities
  • American Depository Receipts (ADR)
role and regulation of dealers in exchange and otc market
Role and Regulation of Dealers in Exchange and OTC Market
  • Regulatory Issues
    • fragmented market
  • NASDAQ Pricing Controversy
  • SEC Cost Study
  • Decimalization
  • Regulation FD
  • SuperMontage
trading mechanisms
Types of Orders

market order

limit order

Short Selling

Margin Transactions

initial margin

maintenance margin

Transactions Costs

explicit costs

implicit costs

Trading Mechanisms
trading arrangements for institutional investors
Trading Arrangements for Institutional Investors
  • Block TradingTrades of 10,000 shares or more of a given stock or trades with a market value of $200,000 or more.
  • Program TradingSimultaneous purchase or sale of shares in a large number of different stocks, which is computer-assisted.
price limits and collars
Price Limits and Collars
  • Stock Market Crash of 1987
  • Trading or Price Limits
    • Rule 80B or Circuit Breakers
    • Rule 80A or Trading Collar
stock market indicators
Stock Market Indicators
  • Dow Jones Industrial Average
  • S&P 500
  • NYSE Composite
  • AMEX
  • NASDAQ Composite
  • Value Line Composite Average
pricing efficiency of the stock market
Pricing Efficiency of the Stock Market
  • Forms of Efficiency
    • Weak form
    • Semistrong form
    • Strong form
  • Implications for Investing in Common Stock
    • Active strategies
    • Passive strategies