Chapter 3
Securities
Markets
1
SECURITIES MARKETS
A.Characteristics
1.Transfer securities from sellers to
buyers.
2.No net change in the number of
securities in existence
3.Transfer of ownership
4.DOES NOT – Raise funds for firms
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Market Makers
A. Broker
1. Acts as your agent
B. Securities Dealer
1. Stock is purchased from a securities
dealer
2. Buys/Sells from own account
C. Market Makers
1. Over-the-counter securities
2. Organized Exchange
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Market Makers
D. Specialist
1. Market maker on an organized
exchange
a) NYSE
b) American Stock Exchange
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Market Makers
E. Bid and Ask Prices
1. Prices quoted by market makers at
which they are willing to buy and sell
securities
2. Bid = Purchase
3. Ask = Sell
4. 20-21 : willing to purchase at $20 and
sell at $21
5. Set by market makers
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Market Makers
F. Round Lot
1. Normal unit trading in a security
2. Multiples of 100 shares
G. Odd Lot
1. Unit of trading that is less than a round
lot
2. Multiple other than 100
H. Spread
1. Difference between the bid and ask
prices
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Securities Markets
A. Over-the-counter markets
1. NASDAQ
a) National Association of Securities Dealers Automated
Quotation System
B. NYSE (or another organized exchange)
1. Must continue to:
a)
b)
c)
d)
Conform to certain procedures
Publishing quarterly reports
Soliciting proxies for voting
Announcing developments
2. The exchange may delist the securities if the
firm is unable to maintain these requirements
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Securities Markets
C. Ticker Tape
1. YTD % CHG
a) The percentage change in the price of the stock during
the current calendar year
2. HI LO
a) The highest and lowest stock price during the past 52
weeks
3. STOCK
a) Name of the company
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Securities Markets
4. SYM
a) Ticker Symbol
5. DIV
a) Annual dividend paid during the preceding 12 months
6. YLD %
a) Dividend divided by the price of the stock
b) Measures the flow of income
7. PE
a) The price of the stock compared to the per-share
earnings
8. VOL 100s
a) Shares traded expressed in hundreds
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Securities Markets
9. LAST
a) Closing price of the stock
10. NET CHG
a) Change from the closing price on the previous day
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The MECHANICS OF INVESTING
IN SECURITIES
Role of brokers
– full service brokerage firms
– discount brokers
– electronic trading
Differences between
– brokers
– dealers
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The MECHANICS OF INVESTING
IN SECURITIES
A. Place a purchase order with a broker
B. The broker then contacts the securities
dealer
C. Types of Orders
1. Market Order
a) Order to buy or sell at the current price (asking
price)
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The MECHANICS OF INVESTING
IN SECURITIES
2. Limit Orders
a) Day Order
(1) Order to buy or sell at a specified price that is
cancelled at the end of the trading day if not
executed
b) Good-Til-Canceled Order
(1) Order to buy or sell at a specified price that
remains in effect until it is executed by the broker
or cancelled by the investor
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Settlement
D. Confirmation Statement
1.
2.
3.
4.
5.
Broker sends
Number of shares
Type of security
Price per share
Amount due (includes transaction fees)
a) Commission
(1) Payment to the broker for executing an investors buy and
sell orders
(2) Varies between firms
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Settlement
6. Must pay within three business days
a) Settlement date
b) (t+3)
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The Cost of Investing
Commissions
– Full service brokers
– Discount brokers
– On-line brokers
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Cash Versus Margin Accounts
E. Margin
1. Purchasing stock with a combination
of your cash and credit supplied from
the broker
2. Margin is your equity in the security
3. Margin = Equity/Total value of the
portfolio
a)
b)
c)
d)
Own stock worth $10,000
You paid $8,000 in cash
You borrowed $2,000 from broker
Margin = 80%
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Margin Requirements
F. Margin Requirement
1. The minimum percentage, set by the
Federal Reserve, of the total price that
must be put up to buy securities
2. Interest on amount borrowed
a) Based on what the firm must pay to lending
institution
3. Must payback initial borrowed amount
no matter what happens to the stock price
4. Additional Collateral/Margin Call
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Margin Requirements
G. Financial Leverage
1. Use of borrowed funds to magnify the
percentage return on an investment
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Delivery of Positions
A. Leave securities with the broker
1. Mandatory - Margin accounts
2. Street Name
a) Registration of securities in a brokers name instead of
the buyers name
3. Broker is the custodian
4. Broker sends monthly statement to investor
a) Lists transactions
b) Dividends
c) Interest
d) May leave dividends and interest in account and
reinvest
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Delivery of Positions
1. Advantages
a) Convenience
b) Do not have to store documents
c) Easy to sell
2. Disadvantages
a) Brokerage firm fails
b) All documentation sent from company will be
delivered to brokerage firm
(1) Annual Reports
(2) Financial Statements
(3) Announcements
B. Take delivery
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Long and Short Positions
Long (bullish) position
– Anticipates rising prices
Short (bearish) position
– Anticipates falling prices
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The Short Sale
A. Long Position
1. Purchase securities in anticipation of a
price increase
B. Short Position
1. Sale of borrowed securities in
anticipation of a price decrease
2. Borrow stock and sell it, if price
declines, buy back stock and pay off
loan
3. Contract for future delivery
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Measures of Securities Prices
A. Overall performance of a grouping of
securities
B. Dow Jones Industrial Average (DJIA)
1. 30 Stocks - Largest, most well known
companies in nation
C.
D.
E.
F.
G.
Standard & Poor’s 500 Stock Index
NYSE Composite Index
NASDAQ Index
Wilshire 5000
Russell 1000
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Measures of Securities Prices
H. How are indexes calculated?
1. Simple Averages
a) Adds the prices and divides by the number of
entries
2. Weighted Averages
a) Multiplies the price of each stock by the
number of shares outstanding
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Foreign Securities
Foreign stocks or bonds traded in
American markets
A. London, Paris, Tokyo Exchanges
1. Unless forbidden, one may purchase
securities from these exchanges
B. American Brokers that have access
to foreign exchanges
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Foreign Securities
C. American Depository Receipts (ADRs)
1. Receipts issued for foreign securities held
by a trustee
2. Reduce the risk of fraud
3. Authenticity is certified by an issuing agent
4. Convenient
5. Prices are quoted in dollars
6. Receipts issued in English
7. Dividend payments received in dollars
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Foreign Securities
D. Foreign Bonds
1. Bonds issued by foreign firms
2. Bonds issued by foreign governments
3. Bonds issued in foreign countries by
American Firms
a) Firms can sell bonds in local currency
b) Eurobonds
(1) Bonds sold in a foreign country but denominated in the
currency of the issuing firm
(2) Dollars
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Competition in the Securities
Markets
Easy entry and exit
Information disseminated rapidly
Price changes occur quickly
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Efficient Markets
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Efficient Market Hypothesis
A. Efficient Market Hypothesis
1. Theory that securities prices correctly
measure the current value of a firms future
earnings and dividends
Current price properly values a stock
Cannot expect to consistently out perform
market as a whole
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Efficient Market Hypothesis
Empirical results support the hypothesis
Exceptions to efficient market
hypothesis: “anomalies”
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