Securities Market
Financial Markets:
 Chief function: allocate resources optimally
 Allocationally efficient
 Channeling of funds to those who can make the best use of them
 Operationally efficient
 Lowest possible prices for transactions services
Primary market
 Borrower issues new securities in exchange for cash
 Seasoned new issues
 sale of new common stock of a publicly traded co. that has outstanding shares
 Initial Public Offering (IPOs)
 issuer is selling securities for the first time publicly
 Once the original purchaser sells the security they trade in the secondary market
Most new issues trade in the OTC
● Hot Issue---issue that opens for trading in the secondary market at a premium to the
public offering price
 Free Riding and Withholding Policy:
 Certain individuals cannot purchase HOT issues at the Public
Offering Price
 Prohibited Individuals:
1. member firms for their own account
2. officers, directors, agents or employees of member firms
3. the immediate family of those listed above
4. any person who acted in a fiduciary capacity in the
underwriting capacity
5. officers of banks, insurance cos., & other institutions &
employees in a position to influence buying & selling of
securities
 Green Shoe Clause
 Underwriters may request up to 10% additional shares to cover
overselling
 Sticky Issues---new shares open in the secondary market at or just below the Public
Offering Price
 Stabilizing bids entered by the syndicate manager at or just below the POP
 Syndicate manager prohibited from entering a bid above the POP
 Syndicate penalty bid clause
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Investment Banker
 Specialize in the design and sale of securities in the primary market while operating
simultaneously in the secondary market
 Helps in organizing mergers and acquisitions
 Provides important advice to their clients during the planning stage proceeding the
issuance of new securities
 Advice is offered in 1 of 2 arrangements with the issuing company:
1. Negotiated bids--most corporate stock and bonds
2. Competitive bids--most public utilities
 Advice includes:
 Type of security
 Features
 Price
 Timing
 Designing prospectus
 Underwrite
 Income --spread
 Reduce risk by forming syndicate
 Syndicate
 Managing underwriter
 Decisions
 Perform/ensures due diligence
 Paid a management fee
 Types
 Western
 Liability limited to agreed upon specified participation
 Eastern
 Liability rests on all issues not sold--even if you sold
your total % assigned to you
 Selling groups--help to sell the issue
 Act as agent
 No financial responsibility
 Receive a selling commission
 Selling group agreement
 Fees
 Manager fee
 Underwriter concession
 Selling concession
 Reallowance
 Small discount given to firms that are not in the
syndicate nor the selling group that want to buy
the security
 SEC Rule 415 (shelf-rule)
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Private Placement
 New issues sold directly to purchaser
 Advantage
 Issuing firm does not have to register the issue with SEC
 Investment fees are saved
 Disadvantage
 Higher interest cost
 Lack of marketability
 Possible restrictive provisions
Secondary Market
 Types:
 Auction market-bidding in a specific physical location
 Negotiated—decentralized dealer network
 Classifications:
 First Market
 Second Market
 Third Market
 Fourth Market
First Market
 Auction market--bidding process in a specific location
 Investors represented by brokers
 NYSE
 Founded in 1792
 Largest secondary market
 Oldest and most prominent secondary market
 Not-for -profit organization
 1366 seats plus individuals
 Specialists
 Own 33% of all seats
 Assigned a trading post
 Handle one or more stocks
 Listing requirements
 Reports on Program trading
 American Stock Exchange
 Specialist-based system
 Smaller and fewer companies are listed here than on NYSE
 Large business in options and derivatives
 Lower spreads than on NASDAQ
 Lower velocity than on NASDAQ
 Regional Exchanges
 Listing requirements much more lenient than either NYSE or AMEX
 Limited geographical interest
 Dual listing
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Second Market
 Negotiated Market
 Dealers who stand ready to buy or sell securities at a specified price
 Handles both unlisted and listed securities
 OTC Market
 Network of dealers who make a market by standing ready to buy and
sell securities at a specified price
 Handles securities not listed on a stock exchange
 Pink Sheets
 NASDAQ
 Communications network for trading stocks
 Wholly owned subsidiary of the NASD
 Doesn't have a specific location
 Electronic trading system
 Orders executed either by
 if broker's firm makes a market in the security, the order will be
executed internally at a price equal to or better than the best price
quoted by all competing market makers
 if broker's firm is not a market maker in this security, the firm will
buy from or sell to a market maker at another firm
Third Market
 All off-exchange transactions in securities listed on the organized exchanges take
place here
 Firms that are only NASD members and not members of the NYSE can trade
exchange listed stocks "off the floor"
 Open 24 hours
Fourth Market
 Transactions made directly between large institutions or wealthy individuals
bypassing brokers and dealers
 Communications network among investors
 Privately owned Electronic Communications Networks (ECN)
 Computerized trading network that matches buy and sell orders electronically
entered by their customers
 If no match post its best bid and ask price on Nasdaq under its name
 Trading limited to members only
 Instinet
 Service for brokers, dealers, exchange specialists, fund
managers, and plan sponsors
 Allows large traders to bypass brokers
 Island
 Posit
 In-House trading
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Stock Market Indicators
 Market Average
 Index
DJIA
 Arithmetic average
 Composed of blue-chip stocks
 Large, well-established, and well-known companies
 Price-weighted series
 Bias against growth stocks
 Only have 30 stocks
 Criticism:
 Only 30 stocks
 Price weighted (per share)
 Equal weight to equal dollar changes
 High-priced stocks carry more weight than low-priced stock
o 1% change in a $200 stock vs a 1% change in a $20
stock
 High price stock splits loses importance
 Bias against growth stocks
 Divisor not adjusted for stock dividends of less than 10%
S& P Stock Price Index
 Five market index
 Market-value index (total market value of members)
 Consist primarily of NYSE stocks
 Dominated by the largest corporations
NASDAQ Index
 Eight indexes
Value-Line
 Composite Index
 Equally weighted geometric average of stock prices
 Composed of 1700 companies
 Good estimate of the median price change of stocks covered
 Arithmetic Index
 Change in index = sum of price change of all stocks in the index
divided by the number of stocks
 Good estimate of the price performance of an equal dollar portfolio of
stock
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Wilshire Index
 Broadest of all indicators
 Composed of 7000 stocks
 Representing the dollar market value of all NYSE & AMEX stocks
Foreign Market Index:
 EAFE Index
 NIKKEI 225 Avrg
 Fin. Times Actuaries Share Index
 Dow Jones World Stock
Bond Market
 Traded on NYSE
 Few hundred issues listed
 Automated Bond System
 85% of NYSE volume is in nonconvertible debt
 Secondary market is primarily OTC
Treasury Bonds
 Fed will sell to investors for Treasury
 Large bank acts as dealers
 Smaller banks & brokers will transact in theses for you
Agency Bonds
 Basically the same as Treasuries
Municipal Bonds
 Thin market
 Most bonds held to maturity
Corporate Bonds
 Typically trade is less than 15 bonds on NYSE
 Most trade off the exchanges
 Mostly institutions
 Round lots of at least 250 bonds
Option Market
 Exchange using a system of market makers
 Bid/ask prices quoted by market makers
 Floor brokers
Futures
 Exchanges with "pits"
 Open-outcry
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Changes in Securities Market Caused by:
 Dominance of Institutional investor
 Trade in large blocks
 Passage of Securities Act Amendment 1975
 Called for a national market system
 Central order routing system
 Intermarket Trading System
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