investments vicentiu covrig 1 securities markets (chapter 6)

InvestmentsVicentiu Covrig

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Securities MarketsSecurities Markets(chapter 6)(chapter 6)


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Organization of the Securities Organization of the Securities MarketMarket

Primary markets- New issues

Secondary markets- Outstanding securities are bought and sold


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Primary Capital Markets BondsPrimary Capital Markets Bonds(see also chapter 3)(see also chapter 3)

Government bonds: Treasury bills: one year maturity or less Treasury notes: maturities of two to ten years Treasury bonds: original maturities of more than ten years

Municipal bonds: General obligations: backed by full taxing power Revenue: pay interest from the revenue

Corporate bonds: By level of claim: secured and unsecured (debenture) By credit quality: investable and high-yield (high risk)


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Primary Capital Markets Common StockPrimary Capital Markets Common Stock New issues are divided into two groups Seasoned new issues

- New shares offered by firms that already have stock outstanding

Initial public offerings (IPOs)

- Firms selling their stock to the public for the first time


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Relationships with Investment BankersRelationships with Investment Bankers

1. Negotiated- Most common- Full services of underwriter

2. Competitive bids (Dutch auction, Google)- Corporation specifies securities offered, then seeks bids- Reduced costs but also reduced services of underwriter

3. Best-efforts- Investment banker acts as broker, selling all it can at a

specified price


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Why Secondary Markets Are Important?Why Secondary Markets Are Important?


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Secondary Equity MarketsSecondary Equity Markets

Stock Exchanges (First Market)- Major national stock exchanges

New York, American, Tokyo, and London

- Regional stock exchangesChicago, San Francisco

Over-the-counter market (Second Market)- Stocks not listed on organized exchange

Third Market Fourth Market


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Physical location stock exchanges vs. Physical location stock exchanges vs. Electronic dealer-based marketsElectronic dealer-based markets

Auction market vs. Dealer market (Exchanges vs. OTC)

NYSE vs. Nasdaq Differences are

narrowing


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Exchange (NYSE) MembershipExchange (NYSE) MembershipFour categories of membership: Specialists

- Maintain an orderly market in a stock Commission brokers

- Member firm employees executing orders for clients of the firm

Floor brokers- Independent brokers who work for other brokers

Registered traders- Members who buy and sell for their own accounts


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Over-the-Counter (OTC) MarketOver-the-Counter (OTC) Market

OTC: Not a formal organization or a single location Trading listed and unlisted issues (third market) Lenient requirements for listing on OTC

The Nasdaq System National Association of Security Dealers Automated Quotation system Dealers may elect to make markets in stocks Three levels of quotations available

- Level 1 shows a median representative quote- Level 2 shows quotes by all market makers- Level 3 is for OTC market makers to change their quotes shown


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Third MarketThird Market OTC trading of shares listed on an exchange: GM, IBM, AT&T, Xerox Electronic exchanges (ECNs): Instinet, Archipelago May be important to investors particularly when the exchange is closed or

when trading is suspended on the exchange

Fourth MarketFourth Market Direct trading of securities between two parties with no broker involved Both parties typically large, institutional investors making large trades Savings in transaction costs can be large for such investors to deal directly with

one another


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Major Types of OrdersMajor Types of Orders Market orders

- Buy or sell at the best current price

Limit orders- Order specifies the buy or sell price

Stop loss- Conditional order to sell stock if it drops to a given price

Stop buy order- Investor may want to limit loss if stock increases in

price


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Major Types of OrdersMajor Types of Orders

Short sales

- Sell overpriced stock that you don’t own and purchase it back later (at a lower price)

- Borrow the stock from another investor (through your broker)


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Buying on Margin: On any type order, instead of paying 100% cash, borrow a

portion of the transaction, using the stock as collateral Interest rate is based on the call money rate from a bank Regulations limit proportion borrowed and the investor’s

equity percentage (margin)- Margin requirements are from 50% up

Maintenance margin- Required proportion of equity to stock value

- Minimum requirement is at least 25%

- Margin call to meet margin requirement


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Margin Example: Buy 100 shares at $60 = $6,000 position Borrow 50%, investment of $3,000

If price increases to $70, positionValue is $7,000

Less - $3,000 borrowed

Leaves $4,000 equity for a

$4,000/$7,000 = 57% equity position


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Learning objectivesLearning objectives Discuss the purpose and function of a market. Discuss the characteristics that determine the quality of a market. What is the difference between a primary and secondary market? Briefly discuss the government bond issues, municipal and corporate bonds Know what are the seasoned new issues and IPO; Discuss the relationships

with investment bankers Discuss why secondary markets are important. Briefly discuss how bonds are traded in the secondary market Know what are, and the differences between the major national exchanges

(NYSE), Over-the-counter markets (NASDAQ), third and fourth markets (see slides 9 to 13)

Discuss the exchange membership


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Learning objectivesLearning objectives Discuss the two alternative trading systems: pure auction market and the dealer

market Discuss what are the main features of the National Market System Know the four type of orders; and short selling; and trading on margin

(including the numerical example you have it in the notes) Recommended exercises: Questions 1, 3,4,9,13; Problems 2,5

investments vicentiu covrig 1 securities markets (chapter 6)

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