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Security Markets
Financial markets:
o Money market, Capital market, Derivative market
What is the role of the financial market?
o To link borrowers an savers
!orrowers have a capital nee
"elps firms to access capital
o Where investors can earn a return
o Want to o it efficiently an optimally #lowest price$
Char%e a fee base on the e&pectations of you
o '&chan%es offer easy coorination of money transfers
Financial Markets
o Primary Markets
(ew securities are issue #sol$ from a company, state, or the %overnment
'&ample: )ohn buys a new "ona car from the ealer*
+enerally small investors won,t trae in primary market
Initial Public offering (IPO)
- bulk of shares first issue
Companies have to fill out a form, S./, when first %oin% public*
o 0ften contains useful information to an investor
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China is an increasin%ly important player in the 120 market*
o (umber / in 120,s in 34/5*
o 6*S* wants to have hi%hest 120 because they want the
market to be eep an li7ui*
Shares Pop: means that shares pop an %et traes almost ri%ht
after they are sol in the primary market*
Seasoned New Issue:
The company is not new to the market8 they 9ust want to issue new
aitional shares*
o Shelf.re%istration:
-llows them to issue securities 7uickly in the future*
:ou have alreay pre.re%istere the shares
This new issues are sol by the investment banker usin%
unerwritin%*
o 1nvestment bankers act as intermeiaries between issuer an
investor*
o They are compensate by a spread, which is the ifference
between what they pay the issuer for the securities an what
they sell them for to the public*
o Underwriting: !uy shares at a iscount, an sell it at a
premium*
This is very risky because the shares can %o up an
own in secons an they coul loose a lot.
o Syndicate: The investment banker can protect themselves
from risk by makin% other bankers 9oin the sellin% process*
1t helps to iversify their risk
Private placement: When a firm issues new securities irectly to financial
institutions, bypassin% the open market*
-vanta%e: Firm on,t have to re%ister the issues with S'C
1t saves on fees
o Secondary Market
1niviual investor
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'&ample: )ohn sells the "ona on crai%slist to ;isa*
Seconary market allows the investors to trae e&istin% securities*
'7uities:
6*S market is the leaer in the train% of securities
Ma9or well.known e&chan%es:
o (:S': physical location in (ew :ork
o (-SD-<: electronic market
o !-TS:
'&chan%es trae listed securities, the securities of companies
meetin% specific re7uirements of e&chan%es an marketplaces
o Company,s must choose where their shares will be liste for
train%
o 'ach company pays a listing fee
;ike payin% for bein% a member
Companies that o not trae on the e&chan%e usually fail to 7ualify
for train% on an e&chan%e, an some simply choose not to*
o These securities woul be consiere over-the-counter
securities: not trae on e&chan%e*
- broker represents investors in the e&chan%e an attempts to
obtain the best price possible for either the buyer or the seller*
o !rokers collect commissions in what bou%ht or sol
(ew :ork Stock '&chan%e #(:S'$
Foune in /=>3, it is the olest an most prominent seconary
market in 6*S
o Starte as a physical e&chan%e
o -lso has an electronic component ue to competition
?nown as a hybri e&chan%e
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Worl,s most valuable e7uity market
1t,s a very fair an orerly market
1t is run by one specialist on an auction market
o 0ne specialist controllin% the price of a stock
o Specialist also calle market maker
o - specialist is in char%e of analy@in% /.3 stocks
(:S' 'urone&t
o Si& cash e7uities e&chan%es in five countries
o Aepresents B4C in the worl,s e7uities train%
;istin% re7uirements:
o The national interest of the company by investors
o Stability in the inustry
o 2rospect for maintainin% is relative position
Train% on the (:S':
o 1nstitutional investors usually trae in lar%e blocks, which is
transactions involvin% at least /4,444 shares*
o Program trading involves the use of computer.%enerate
orers to buy an sell securities base on arbitra%e
opportunities between common stocks an ine& futures an
options*
The (-SD-< Stock Market
1s an electronic or screen.base e&chan%e
o ;ar%est in the worl
(ot any obli%ation, no orer on a aily basis
"as many market makers, calle a dealers
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o +et price 7uota from several specialists at Merrill ;ynch
o Money maker is an iniviual who makes a market in a stock
by buyin% from an sellin% to investors
0rers come from the market makers8 they compete with each
other by %ivin% price 7uotes to (-SD-< hopin% to sell at their
price*
The 0ver.the. Counter Market #0TC$
1t is not liste on an e&chan%e
o 1t is unlisted
They on,t want to be liste
Companies that in,t meet re7uirements
Companies facin% financial ifficulties
o 6nliste companies are consiere hi%h.risk investments
o Aeason for not wantin% to be liste:
:oun% companies mi%ht not want to pay fees, or
re%ulations if somethin% %oes ba*
:ou buy their shares by callin% people aroun
0TC !ulletin !oar an 2ink sheets:
o 2rice an 7uote
-voi unliste stocks, lots of scamsDD
!-TS #!etter -lternative Train% System$
?eywor:
o Spee
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?nown for 7uick e&ecution
6se to sell shares super fast
1t appeals to he%e funs because they are easily an 7uickly trae
'lectronic Communication (etworks #'C(s$
Computeri@e network that match buyers an sellers
o 1t offers anonymity an low cost
Mi%ht not happen as 7uickly as !-TS
'C( allows investor to o after.hour train% as lon% as they match it
with a buyer
Forei%n Markets
China has been boomin% as an economy, offerin% potential hi%h
return, but with %reat risk
o !ecause political ecisions can stron%ly affect investments
o Stock Market Indexes
E main known ine&es:
/* D)1- 1ne&
3* SF2 E44 1ne&
5* (-SD-< 1ne&
B* Aussell /444
E* Wilshire E444
G* SF2 B44
What oes ine&es o?
1t is a representation of performance
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1t is a escriptive measure
o HDescribes the marketI
Calculate the value on a list of stocks
Two types of 1ne&es:
o 2rice 1ne&: 6sually liste
o Total Aeturn 1ne&: Divien is inclue
The Down )ones -vera%es
Down )ones measures only the chan%e in prices of a efine %roup
of stocks over some perio of time*
o They i%nore ivien payments*
!est known avera%e is the Down Jones Industrial Aerage
o 1t is compute from 54 leain% stocks or blue.chips
lue-chip stocks: ;ar%e, well.establishe, an well.
known companies
- 2rice.Wei%hte 1ne&
o 1t %ives e7ual wei%ht to e7ual ollar chan%es, which results
in that hi%h price stocks carry more wei%ht than lower
prices stocks*
Dow 1ne& 2oints an ;evels
o 2oint chan%e isn,t that si%nificantly important
Criticism on D)1-
o 1t only uses 54 stocks to evaluate the overall market
o 2rice wei%ht ine& is more sensitive to chan%es if the stock
price is hi%her than a lower.price stock*
Jalue wei%hte are more accurate
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Stanar an 2oor,s Stock 2rice 1ne&es
SF2,s E44 is referre to a H%ooI measure of what the overall
market is oin%
o Contains mainly (:S' stocks
o 1t accounts for about =EC of all 6*S stocks
Makin% it a useful benchmark
o Down )ones is inclue in this ine&
Capitali@ation.Wei%hte 1ne&es #Jalue.Wei%hte$
o 1t is a market value ine&
o -ll stock splits an iviens are accounte for
o Market !alue " Price per share x #umber o$ Shares
o - all Market Jalues up to %et Total Market Jalue
o #ew !alue o$ index " #ew %otal Market !alue x ase
&ld %otal Market !alue
(-SD-< /44 1ne&
1s the most important ine& to investors
The (-SD-< Composite 1ne& measures all (-SD-< omestic. an
international.base common type stock liste on the (-SD-< Stock
Market*
o 1t is heavily ominate by the technolo%y stocks
0ther 1ne&es
!ussell "## is closely correlate to the SF2 E44 because it consists
primarily of Hlar%e capI stocks*
$ils%ire "### &otal 'arket Inde( claims to be a comprehensive
measure of the entire 6*S* stock market
o -lso inclues primary e7uities
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o This ine& coul be use to appro&imate ollar chan%es in
the 6*S e7uity market
6sin% the correct omestic stock ine&
SF2:
o Measure how lar%e stocks are oin%
Aussell:
o Similar SF2 E44
Measure lar%e #/444$
Small caps #3444.5444$
Jolatile
(-SD-< Composite:
o To measure all (-SD-< securities
Wilshire:
o Measure stock market in a broa sense
-lways compare your portfolio to an ine& that has similar investments
Market Caps
/* (ano Cap
3* Micro Cap
5* Small )ap /4 million. 3*E billion -FF
B* 'id )ap 3*E K /4 billion
E* *arge )ap /4.3E4 billion
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G* Me%a Caps 3E4 L billion +'
Forei%n Stock market inicators
'( Well known ine& for forei%n stocks, an also the olest
international ine& is the MS)I *+,* Index -Morgan Stanley.
o Measures the performance of ma9or international e7uity
markets
o Disavanta%e: 1t oesn,t inclue rapily %rowin% emer%in%
markets such as !ra@il an 1nia*
/( 0own 1ones 2orld Stock Index covers 2acific Ae%ion, 'urope,
Canaa, Me&ico, an the 6*S*
o 1t,s esi%ne to be a comprehensive measure
o 1t represents about M4C of worl stocks
o 1t uses a capitali@ation.wei%hte ine&
3( 4lobal 0ow
SM
Index is esi%ne to reflect the %lobal stock market,
as it actually e&ists in terms of inustries an re%ions*
o 1t consists of /E4 stocks representin% leain% companies
from aroun the worl
o ond Markets
1nvestors can buy bons that are bein% issue in the primary market or
e&istin% bons in the seconary market*
(:S' has the lar%est bon market of any e&chan%e, calle (:S' !ons
(o not buy iniviual bons, it,s risky because they are bou%ht 0TC
o 6se a mutual fun to buy bons
1f you want to buy / bon, with %oo service you nee to invest at least
N/44,444 in that one bon
1niviual investors an bon train%
1nvestors %enerally must use a broker to buy bons
Most bons trae over.the.counter
The bon market is a ealer to ealer market
!on brokers usually buy the bons for their own accounts an sell
at a profit
- small number of corporate bons are liste on the e&chan%e
o 0erivative Markets
0ptions trae on e&chan%e
- bi or aske price is 7uote by the market maker
'lectronic e&chan%e
Future contracts usually traes on e&chan%e in esi%nate HpitsI
The pit traer offers to buy or sell contracts at an offere price an
other pit traers are free to transact as they wish*
Futures are not more common to be electronic*