Securities Markets
Reference: Chapter 3 BKM
How Firms Issue Securities
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Primary Market: Market for new issues of securities
Secondary Market: Market for already existing securities
There are two types of primary market issues;
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Underwriting: Public offerings of both stocks and bonds
typically are marketed by investment bankers who in this
role are called underwriters
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IPO
Seasoned
Firm Commitment vs. Best Efforts
Prospectus: A description of the firm and the security it is
issuing
How Firms Issue Securities (continued)
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Underwriting Syndicate
Shelf Registration: Register securities and gradually sell
them to the public for two years following the initial
registration
How Securities are Traded; Types of
Markets
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Direct Search Markets:
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Least organized
Direct seeking by buyers and sellers
Commodity is low-priced, non-standard
Brokered Markets:
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Active trading
Brokers have specialized knowledge
“Block Houses”
How Securities are Traded; Types of
Markets (continued)
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Dealer Markets: Markets in which traders specializing in
particular assets buy and sell for their own accounts
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Dealer’s spread b/w bid and ask prices
OTC is an example
Auction Markets: A market where all traders meet at one
place to buy or sell an asset
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Continuous vs. Periodic
Types of Brokers
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Full service brokers are firms offering information
(on different securities) and advice (for selling and/or
buying) apart from usual services.
Discount brokers are firms offering less (or no)
research services and will charge less.
Online brokers offer much similar services as full
service brokers but trade interfaces are available to
clients for online trading.
Types of Brokers (at KSE)
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Dealing or execution only, i.e., your broker deals for
you and executes your instructions.
Advisory means the broker will offer you advice on
buying, selling, or holding a specific scrip.
Discretionary; Broker takes all the buying and selling
decisions, informs you regularly regarding your
portfolio.
Types of Brokerage Accounts
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Cash account authorizes a customer for cash
transactions only.
Margin account authorizes a customer to transact
for a value greater than the available cash, i.e., use a
loan.
Asset management account are unique, i.e., offering
services such as investment of cash balances in funds
and check writing facilities etc.
Wrap accounts are special types of accounts
accumulating all costs in one fee.
How Securities are Traded; Types of Orders
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Bid price is the price at which a dealer or other trader is
willing to purchase a security
Ask price is the price at which a dealer or other trader
will sell a security
Bid-Ask spread is the difference between a dealer’s bid
and asked price
Costs Associated with Trading
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Commission charged by the broker depends upon;
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Price of a security;
Market in which the security is traded, etc.
CVT @ 0.02% of purchase price.
WHT @ 0.005% of sale value (replaced with FED).
Placing Orders for Trading
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An order may be classified on the basis of;
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Type of transaction (e.g., buy or sell)
Price (e.g., market or limit)
Duration/Time (e.g., day or good till cancelled)
Orders may be placed through phone, in written, or
online.
Placing Orders for Trading
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Bid (buy) order is placed if an investor wants to buy
securities.
Offer (sell) order is placed if an investor wants to
sell securities.
Short sale is the sale of borrowed stocks with the
hope of returning them at lower prices.
Buy to cover is the sale executed to close out a
short position.
Placing Orders for Trading
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Both bid & offer orders are;
 Market or at Best orders, or
 Limit orders, and/or
 Stop orders
Limit order specifies a limit for the purchase (in bid order)
or sale (in offer order) price.
An order is a market order if no price (purchase or sale) is
specified by investor and is executed at available best
market price.
An order to buy or sell a security when its price crosses
the specified level is called stop order.
Placing Orders for Trading
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Orders may have Time in Force Restriction, i.e.,
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Day (market orders are always day orders)
Good Till Cancelled (GTC) (i.e. Open)
Good to Date (Month-Day-Year) (GTD)
Good for Week (GTW)
Good for Month (GTM)
Fill or Kill (FOK) (placed outside market hours, and
executed in the immediate next trading session)
Sorting Orders
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Limit orders are ranked on the basis of price first, i.e.,
highest price in buy orders and lowest price in sell
orders are settled first, and then on first come & first
serve basis, i.e., two orders with same price will be
ranked on which order reached the exchange floor first.
Limit orders will be executed only if the specified prices
are available.
Unsettled limit orders are queued for future execution
(up to 90 days) and do not lose priority.
Volume of the limit orders may not match for settlement.
Sorting Orders
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Market orders are settled with the top limit order.
If partially completed the market order is fulfilled from
the next available limit order in the queue.
Must be executed immediately.
Sorting Orders
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Stop orders are of two main types;
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Stop Buy Order
Stop Loss Order
Stop buy order specifies a price which if breached
triggers buying.
Used by momentum traders who wish to take
advantage when the stock price has moved upwards
past a threshold level indicating upward momentum
that is expected to continue.
Sorting Orders
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Stop loss order is an order to sell stock if the price
lowers than the specified price.
Useful when investor wants to limit losses, especially
during short selling.
Sorting Orders
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Following terminologies are often encountered in trading;
 Tick Size; the minimum amount that a price of stock
may change by. It is one paisa at KSE.
 Circuit Breakers/Locks; Level at which trades are
stopped in a particular scrip. At KSE trading is restricted
in upper & lower limits of 5% or Re. 1/-, whichever is
higher/lower, from last closing price.
 Market Lot; Minimum tradable quantity of shares.
Execution of Orders on Trade
Screen
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A partial trade screen looks like;
Symbol
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Bid Volume
Bid Price
Ask Volume
Ask Price
Hypothesize a company with a ticker/symbol XYZ.
Symbol
XYZ
Bid Volume
Bid Price
Ask Volume
Ask Price
Execution of Orders on Trade
Screen
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Investor A wants to buy 1000 shares of XYZ @ Rs.
10.00 (a limit order);
S. No. Symbol Bid Volume Bid Price Ask Volume
1
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XYZ
1000
Ask Price
10.00
Investor B wants to sell 500 shares of XYZ @ Rs.
10.80 (a limit order)
S. No. Symbol Bid Volume Bid Price Ask Volume
1
XYZ
1000
10.00
500
Ask Price
10.80
Execution of Orders on Trade
Screen
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A bid (buy) market order for 250 shares of XYZ
reaches;
S. No. Symbol Bid Volume Bid Price Ask Volume
1

XYZ
1000
10.00
250
Ask Price
10.80
A sell (ask) market order for 500 shares reaches;
S. No. Symbol Bid Volume Bid Price Ask Volume
1
XYZ
500
10.00
250
Ask Price
10.80
Execution of Orders on Trade
Screen
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A bid limit order reaches of 500 shares @ Rs. 10.01
per share;
S. No. Symbol Bid Volume Bid Price Ask Volume
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1
XYZ
500
10.01
2
XYZ
500
10.00
250
Ask Price
10.80
A sell (ask) limit order for 500 shares @ Rs. 10.75 per
share reaches
S. No. Symbol Bid Volume Bid Price Ask Volume
Ask Price
1
XYZ
500
10.01
500
10.75
2
XYZ
500
10.00
250
10.80
Execution of Orders on Trade
Screen
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Following orders reach the exchange;
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Bid limit order of 500 shares @ Rs. 10.50, and
Ask limit order of 250 shares @ Rs. 10.50
S. No. Symbol Bid Volume Bid Price Ask Volume
Ask Price
1
XYZ
500
10.50
250
10.50
2
XYZ
500
10.01
500
10.75
3
XYZ
500
10.00
250
10.80
Prices are matching but quantities are not. 250 shares @ Rs.
10.50 will be transferred to the bid trader.