Securities Market
Investments and Portfolio
Management
MB 72
Outline
 Meaning of Financial Markets
 Role of Financial Markets
 Types of Financial Markets
– Primary Markets
– Secondary
• Stock Exchanges
• Over-the-Counter Market
• Third and Fourth Market
 Mechanics of Trading
– Types of Orders
– Margin Trading
Financial Markets
A place where borrowers and lenders are
brought in contact with one another
Help in allocation of scarce resources in
the economy
Channeling savings into investments
Provide an economy’s link with the future
Primary Markets
 New issues market which brings together the
supply and demand or sources and uses for new
capital funds
 A market where securities are issued for the first
time
 contributes directly to capital formation
 any increase in primary market activity leads to
more investment, more capital formation
Secondary Market
 Deals in existing securities; market for buying and selling of existing securities
 does not directly contribute to capital formation
 increase in volume of business in the secondary market does not mean more capital
formation
 Indirectly helps in capital formation
 Secondary markets can be classified as:
–
–
Auction Markets
Negotiated Markets
 Stock Exchanges are classified as auction markets
 Over-the-Counter Market
 What is a third market?
 What is a fourth market?
Mechanics of Trading
 Open a brokerage account
– cash account
– margin account
 Types of Orders
– Market order
• buy/sell securities at the best available price in the market
– limit order
• specifies a particular price to be met or bettered
– stop order
• specifies a certain price at which a market order is to take over
Margin Trading
 A customer can pay part of the total amount due and borrow the remainder from the
broker, who in turn typically borrows from a bank to finance customers.
 Margin is that part of a transaction’s value that a customer must pay to initialize the
transaction. It is part of the total value of the transaction that cannot be borrowed from
the broker.
 What is initial margin?
– Part of a transaction’s value that a customer must pay to initialize a transaction
 What is maintenance margin?
– Minimum amount needed in the investors account at all times as compared to the
market value
 What is margin call?
– A margin call is issued when the actual margin declines below the maintenance
margin
Market Value of
securities
minus Amount Borrowed
Actual Margin = ----------------------------------------------------------Market Value of Securities