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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