Chapter 18
COMMON STOCK
MARKETS IN THE
UNITED STATES
Characteristics of
Common Stock
Equity securities represent an ownership
interest in a corporation.
Common stockholders are the residual
owners.
Right to income
Right to assets
Preferred Stockholders have preference
over common stockholders.
Right to fixed dividend
Trading Locations
Stock Exchanges
trading floors
auction system
central auction specialist system
Over-The-Counter Market
no trading floor
negotiated system
multiple market maker system
Independent Electronic Trading Systems
Stock Exchanges
Major National Stock
Exchanges
NYSE or Big Board
AMEX or ASE or Curb
Regional Stock
Exchanges
Boston, Chicago,
Cincinnati, San
Francisco, Philadelphia
OTC Market
NASDAQ
NASD
Securities Act of 1934
Categories of traded stocks:
exchange listed (national and regional
exchanges)
NASDAQ listed OTC stocks
Non-NASDAQ OTC stocks
Types of Markets
First Market
trading on exchanges of stocks listed on an exchange
Second Market
trading in OTC market of stocks not listed on an
exchange
Third Market
trading in OTC market of stocks listed on an
exchange
Fourth Market
private transactions between institutional investors
Exchanges
Formal organizations approved and
regulated by the SEC
Members
can only trade listed stocks
must buy a seat on the exchange
Listing requirements
minimum capitalization, shareholder equity,
average closing share price, etc.
NYSE
Centralized
continuous auction
market
Exchange
participants:
single specialist
commission brokers
independent floor
brokers
registered traders
SuperDot
Major roles of NYSEspecialist
Dealer
Agent
Catalyst
Auctioneer
Commissions
OTC Market
Trading unlisted
NASDAQ market
stocks
makers
Listing requirements
Other OTC markets
OTC Bulletin Board
NASDAQ stock market
Pink Sheets
NASDAQ market tiers
NASDAQ National
Market
Small Capitalization
Market
Third Market
Listed stocks traded in OTC market
NYSE Rule 390
Commission
Network of broker-dealers
Fourth Market
Direct trading of stocks between two
customers
Commissions
Alternative trading systems (ATS)
electronic communications networks
crossing networks
Other Types of Common
Stock Trading
Offshore Trading
Rule 144A Securities
American Depository Receipts (ADR)
Role and Regulation of Dealers
in Exchange and OTC Market
Regulatory Issues
fragmented market
NASDAQ Pricing Controversy
SEC Cost Study
Decimalization
Regulation FD
SuperMontage
Trading Mechanisms
Types of Orders
market order
limit order
Short Selling
Margin Transactions
initial margin
maintenance margin
Transactions Costs
explicit costs
implicit costs
Trading Arrangements for
Institutional Investors
Block Trading
Trades of 10,000 shares or more of a
given stock or trades with a market value
of $200,000 or more.
Program Trading
Simultaneous purchase or sale of shares
in a large number of different stocks,
which is computer-assisted.
Price Limits and Collars
Stock Market Crash of 1987
Trading or Price Limits
Rule 80B or Circuit Breakers
Rule 80A or Trading Collar
Stock Market Indicators
Dow Jones Industrial Average
S&P 500
NYSE Composite
AMEX
NASDAQ Composite
Value Line Composite Average
Pricing Efficiency of the
Stock Market
Forms of Efficiency
Weak form
Semistrong form
Strong form
Implications for Investing in Common
Stock
Active strategies
Passive strategies