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How Securities Are Traded9/1/98
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Table of Contents
How Securities Are Traded
Primary versus Secondary
Private Placements
Private Placements
Investment Banking Arrangements
Where Securities Are Trades
Comparison of companies listed on Nasdaq,NYSE, & AMEX
OTC Market
Third Market
Trading on the Exchange
PPT Slide
Types of orders
Trading Securities
OTC versus Exchange Trading
More on Trading
Trading on Margin
Trading on Margin
More on Margin
Author: Susan D. Jordan
Email: [email protected]
Home Page: www.uky.edu/~sjordan/
How Securities Are Traded
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More on Margin
Short Sales
Short Sale: example
Short sale: oops!
Regulation of Security Markets
How Securities Are Traded
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Slide 1 of 23
How Securities Are Traded
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Slide 2 of 23
Primary versus Secondary
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Slide 3 of 23
Private Placements
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Slide 4 of 23
Private Placements
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Slide 5 of 23
Investment Banking Arrangements
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Slide 6 of 23
Where Securities Are Trades
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Slide 7 of 23
Comparison of companies listed
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Slide 8 of 23
OTC Market
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Slide 9 of 23
Third Market
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Slide 10 of 23
Trading on the Exchange
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Slide 11 of 23
PPT Slide
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Slide 12 of 23
Types of orders
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Slide 13 of 23
Trading Securities
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Slide 14 of 23
OTC versus Exchange Trading
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Slide 15 of 23
More on Trading
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Slide 16 of 23
Trading on Margin
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Slide 17 of 23
Trading on Margin
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Slide 18 of 23
More on Margin
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Slide 19 of 23
More on Margin
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Slide 20 of 23
Short Sales
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Slide 21 of 23
Short Sale: example
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Short sale: oops!
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Slide 23 of 23
Regulation of Security Markets
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Private Placements
Public offeringsregistered with the SEC and sale is made to the investing public
prospectus & red herring■
Shelf registration (Rule 415, since 1982)■
❍
Initial Public Offerings (IPOs)
Evidence of underpricing■
Performance■
❍
●
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Private Placements
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Investment Banking Arrangements
3 Basic ServicesAdvice❍
Distribution❍
Underwritten vs. “Best Efforts”
Underwritten: firm commitment on proceeds to the issuing firm■
Best Efforts: no firm commitment■
❍
●
SelectionNegotiated❍
Competitive❍
❍
●
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Investment Banking Arrangements
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How Securities Are Traded
Chapter 3 (BKM)
Finance 650
Fall 1998Lecture notes prepared by:
Dr. Susan D. Jordan
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How Securities Are Traded
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Primary versus Secondary
PrimaryNew issue (IPO or seasoned new issue)❍
Key factor: issuer receives the proceeds from the sale❍
●
SecondaryExisting owner sells to another party❍
Issuing firm doesn’t receive proceeds and is not directly involved❍
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Primary versus Secondary
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Private Placements
Private placements: sale to a limited number ofsophisticated investors not requiring theprotection of registration
Dominated by institutions❍
Very active market for debt securities❍
Not active for stock offerings❍
●
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Private Placements
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Where Securities Are Trades
Organized ExchangesNYSE, ASE (AMEX), Regional❍
Listing Requirements❍
Seat or membership❍
●
The Over-the-Counter Market (OTC)●
Third Market●
Fourth Market●
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Where Securities Are Trades
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Comparison of companies listed onNasdaq, NYSE, & AMEX
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Comparison of companies listed
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OTC Market
Dealer market without centralized order flow●
NASDAQ: largest organized stock market forOTC trading; information system for individuals,brokers and dealers (3 levels)
Securities: stocks, bonds and some derivatives❍
Most secondary bonds transactions❍
●
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OTC Market
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Third Market
Third MarketTrading of listed securities away from the exchange❍
Institutional market: to facilitate trades of larger blocks of securities❍
Involves services of dealers and brokers❍
●
Fourth MarketInstitutions trading directly with institutions❍
No middleman involved in the transaction❍
Organized information and trading systems
INSTINET■
POSIT■
❍
●
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Third Market
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Trading on the Exchange
Commission Broker●
Floor Broker●
Odd Lot Dealer●
Registered Trader●
Specialistbroker => limit & special orders❍
dealer => maintain fair & orderly market❍
book => electronic work station❍
●
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Trading on the Exchange
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PPT Slide
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PPT Slide
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Types of orders
Market●
Limit●
Stoploss (sell)❍
buy❍
●
Stop Limit●
Other features (FK; GTC; Day order)●
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Types of orders
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Trading Securities
Block transaction●
Settlement3 business days since June '95 (T plus 3)❍
Clearing house & netting❍
Street name❍
●
SuperDot●
Program Trading●
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Trading Securities
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OTC versus Exchange Trading
OTCdecentralized dealer market❍
trading through❍
●
Exchangecentralized auction market❍
price priority❍
price discovery❍
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OTC versus Exchange Trading
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More on Trading
Trading costscommissions❍
dealer bid-asked spread❍
price concession❍
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More on Trading
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Trading on Margin
Borrow part of the purchase price from broker(call money rate)
●
Margin = equity/MV of securitiesequity = MV - Loan Balance❍
●
Initial margin●
Maintenance margin●
Margin call (If actual < maintenance)●
Restricted (Initial > Actual > Maintenance)●
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Trading on Margin
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Trading on Margin
Example:●
You have $9,000Initial margin is 50%; maintenance is 30%❍
●
You buy 1000 shares at $18Margin = ($18,000-9000)/$18,000 = 50%❍
●
Price falls to $12, you owe $9,000,Margin = (12000-9000)/12000 = 25%❍
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Trading on Margin
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More on Margin
Margin call occurs at what price?Equity/MV = 0.30❍
0.30 = (MV - $9,000)/MV❍
MV = Loan/(1-.30) = $9000/.7 = $12,857❍
P = $12857/1000 = $12.86❍
●
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More on Margin
http://www.uky.edu/~sjordan/fin650/chapt3_handout_fall98/tsld018.htm [1/19/2000 10:50:35 AM]
More on Margin
Gains and lossesInterest is 5%, you pay $450❍
●
Stock price up by 20%, price is $21.60($21,600 - $18,450)/$9,000 = 35%❍
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Stock price down by 20%; price is $14.40($14,400 - $18,450)/$9,000 = -45%❍
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More on Margin
http://www.uky.edu/~sjordan/fin650/chapt3_handout_fall98/tsld019.htm [1/19/2000 10:50:36 AM]
Short Sales
The long and short of it●
The uptick rule and bear raids●
Hypothecation●
Use of the proceeds● ●
Margin requirements●
Dividends●
Potential losses●
"He that sells what is'n' his'n' . . ."●
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Short Sales
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Short Sale: example
Sell 1,000 IBM at $50●
Initial margin = 50%●
Maintenance margin = 40%●
Margin = 0.50 x $50,000 = $25,000●
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Short Sale: example
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Short sale: oops!
IBM rises to $60Equity = $15,000❍
Margin = $15,000/$60,000 = 20%❍
Critical price: Equity/(1000 x P) = 0.4
($75,000 - 1000 x P)/(1000 x P) = 0.4■
P = $53.57■
❍
●
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Short sale: oops!
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Regulation of Security Markets
Government Regulation●
Self-Regulation●
Circuit Breakers●
Insider Trading●
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Regulation of Security Markets
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