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1、Securities Markets&TradingIntroduction to Securities MarketsPurpose and Characteristics of Well-Performing MarketsPrimary MarketsSecondary MarketsNYSEAMEXNASDAQTradingPlacing Trade OrdersBuying/Selling on MarginTextbook:Ch.3;Bodie/Kane/Marcus;8th Ed.Financial MarketsPurpose of Financial Markets?Effi
2、ciently bring together buyers and sellers of financial assetsWhat do we mean by“Efficiently”?Characteristics of Well-Functioning Financial MarketsSufficient competition to ensure low transaction costsSufficient Liquidity to allow for quick,low-cost transactionsPrice Continuity No Large Price JumpsMa
3、rket Depth markets ability to sustain large market orders without impacting the price of the financial assetInformational EfficiencyAllocation EfficiencyMarket TypesDirect SearchBrokered MarketDealer MarketAuction MarketFinancial MarketsPrimary MarketNew issues of securitiesTypes:Secondary MarketFin
4、ancial Market SpecialistsInvestment Banking Firm Underwriter Brokerage Firm Primary Markets-IPOsWhat is an IPO?Who sells the shares and how do investors know whether or not they want to invest?Investment Banker sells the sharesThe“lead firm”,along with other firms that make up the underwriting syndi
5、cate,markets the shares to investorsThe Underwriting SyndicateSecondary MarketsExchangesNational:NYSE,AMEXListing requirementsRegional:Boston,Pacific,Philadelphia,Chicago,San Francisco,CincinnatiMight not meet listing requirements of national exchangesOver-the-counter(OTC)Informal network of brokers
6、 and dealersNo formal listing requirements for OTC marketNASDAQ(National Assoc.of Securities Dealers Automatic Quotation System)Linked computers no formal exchangeListing requirementsListing RequirementsSummary of Secondary MarketsNYSEExchangeAuctionApprox 3,000 securitiesLarger firmsAMEXExchangeAuc
7、tionApprox 1,000 securitiesModerately-sized firms,ETFsOwned by NYSE Euronext as of Jan 2008NASDAQDealer Market(no centralized trading floor/exchange needed)Approx 3,000 securitiesSmaller firms,heavily-weighted to technologyLargest average daily trading volumeTrading in Secondary MarketsWhat Happens
8、when I actually“make a trade”?You place your order with your broker(recall what this is?)The broker electronically sends the order to the floor of the NYSECommission broker of a member firm sends order to specialist postOrder may be executed with the specialist or another brokerElectronic Trading st
9、reamlines this process and results in cheaper,faster execution of tradesVery large orders still require human interventionECNs-allow institutional investors to post quotes and trade directly with each otherTrading Continued Choosing a BrokerTwo General types of Brokers:Discount Brokers Full-Service
10、Broker-Dealer RelationshipTrading ContinuedRound LotsMultiples of 100 sharesBlock TradesGreater than 10,000 sharesBidAsk spreadsAsk(offer price)dealer will sell at this priceBid dealer will purchase at this priceMany trades occur inside quotesThree components of bid-ask spreads:Inventory componentOr
11、der processing componentAdverse-selection componentTypes of Trades/OrdersOrdersMarket orderLimit BuyLimit SellLimit Orders tend to have higher transactions costs relative to market orders but changing due to increasing competitionStop orderStop-loss Stop-buy Buying on MarginYou can invest in financi
12、al assets using just the money in your bank account orYou can borrow money from you broker and use this loan to purchase stockBuying on MarginMargin Initial Margin RequirementMinimum of 50%(set by Federal Reserve)Maintenance Margin Why purchase on margin?Margin ExampleExample:$6,000 spent on 100 sha
13、res of SLU stock at$100 each,borrowing remainder at 5%interest from broker.After 1 year you liquidate the entire position when the price=$110.What is your Initial Margin?What is your Margin at LiquidationWhat is the return on the stock?What is the return on your original position?Margin Example cont
14、dWheres the extra risk?What if the price dropped to$90 instead of increasing to$110?Stock return?Your return?This is the effect of leverage you lose money even on the stock purchased with borrowed moneyWhat if the stock price had fallen to$50 after only 6 months(ignoring the interest on the loan)?Eq
15、uity in account?Margin Example contdMargin requirements can be met in one of two ways when you receive a margin call(or a combination):1.Send cash(or sell other securities in your account)to the brokerMust restore the account back to the maintenance marginHow much money will it take?2.Sell some of t
16、he positionHow much?Short SellingDefinition:The sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loanThe short seller must pay the lending shareholder any dividends paid before the covering purchaseMargin requirements applyMargin=Equity in Acc
17、ount/MV Securities Equation is the same But this time you are selling the shares rather than buying the sharesShort Selling ExampleYou short 100 shares of SJU at$100 eachYour broker sells the shares and puts the cash into your brokerage accountCash received from short selling the stock=100*$100=$10,
18、000But you owe the stock back,so your“loan”is also currently$10,000As time passes,the value of stock owed=100*P *Variable*Margin requirement=50%How much of my own cash must I add to satisfy the margin requirement?Short Selling Example ContdWhat happens if the share price of FSU falls to$90 next week
19、 and you close the position?Broker repurchases 100 shares at$90 and deposits them into the lending shareholders accountYour profit=?What if SJU paid a$1 per share dividend during the week?How does this affect your profit?Short Selling Example ContdIf the maintenance margin is 30%to what price can FSU rise before you receive a margin call?If FSUs price rises above _ you will have to cover the margin by:Putting up additional cash,orCovering your short position by purchasing shares on the open market(or some of both)