Transcript Эффективные рынки - University of Hong Kong

FINA 2802: Investments and Portfolio Analysis
Securities Markets
Dragon Yongjun Tang
January 21 & 23, 2010
Lecture 4 & 5:
Securities Markets
Reading: Chapter 3
 Practice Problem Sets:

1,2,3,4,6,7,8,9,10,12,13,14,18,20,21
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Learning Objectives

Role of investment bankers in primary issues

Identify the various security markets
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Describe the role of brokers

Compare trading practices in exchanges vs dealer
markets
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Buy Stock on Margin and Sell Stock Short
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Life Cycle of a Company
Private
(Entrepreneur + VC)
Primary
Secondary
Commission Investment Bank
Public
(NYSE/Nasdaq)
Dealer
Market Maker
Buy on Margin
Buy
Sell Short
Bid-ask Spread
Commission
Broker
Commission
Sell
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How Firms Issue Securities
Primary Market:
•Initial Public Offering (IPO)
•Seasoned Equity Offering (SEO)
Investment Bankers:
•Assist firms in issuing securities
•Firm Commitment (Take a risk in
underwriting)
•Best efforts (issuer bears the risk of not
placement)
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Figure 3.1 Relationship Among a Firm
Issuing Securities, the Underwriters
and the Public
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Figure 3.2 A Tombstone Advertisement
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Shelf Registration
SEC Rule 415
Allows firms to register securities and
sell them gradually to the public for two
years.
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Private Placements
 Firms
sell shares directly to a
small group of institutional or
wealthy investors
 Cheaper: No need to register to
SEC (Rule 144A)
 Smaller offerings
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Initial Public Offering
(IPO)
Road shows, bookbuilding
Cost: commissions (7%) + underpricing
Investment bankers tend to underprice new issues
IPO prices tend to rise after IPO (“Money left on the
table”)
IPO are usually poor long-term investments
Internet Auction
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IPO Underpricing:
A dramatic example (VA Linux)

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IPO price: $30
First day closing price: $239.25
Today’s price: $1.00
Replicate this picture using
finance.yahoo.com (LNUX)
Day's Range:
1.00 - 1.04
52wk Range:
0.32 – 2.18
Volume:
Avg Vol (3m):
28,795
270,871
Market Cap:
P/E (ttm):
EPS (ttm):
Div & Yield:
64.31M
N/A
-0.055
N/A (N/A)
Last Trade:
1y Target Est:
1.0025
1.59
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Figure 3.3 Average Initial Returns for IPOs
in Various Countries
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Figure 3.4 Long-term Relative
Performance of Initial Public Offerings
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Where Securities Are
Traded
Secondary Market
Organized exchanges
– NYSE (or the Big Board); AMEX; regional
exchanges
 Over the counter (OTC)
– Nasdaq: market makers; three levels
– Bond trading
 Directly between the two parties
– Electronic Communication Networks (ECN)

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National Market System
•Established by Exchange Act of 1975
•Intent was to link firms electronically
•Resulted in Consolidated Tape
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Bond Trading
Major concern: Liquidity
Automated
Bond System
(ABS)
OTC
market
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Trading on Exchanges
The participants:
 Investors
 Brokerage firms (owns a “seat”
on the exchange)
 Commission brokers
 Floor brokers
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Trading on Exchanges
The specialist (or market maker):
•Makes a market
•The brokers’ broker
•Maintains the limit order book
•Maintains a fair and orderly market
NYSE is an example
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New York Stock
Exchange (NYSE)
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Trading on Exchanges
Types of orders:
Market
 Limit
 Day
 Good-till-canceled
 Stop-loss orders; stop-buy orders

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Figure 3.5 Limit Order Book for Intel
on Archipelago
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Figure 3.6 Price-Contingent Orders
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Trading on Exchanges
Block orders - at least 10,000 shares
DOT & SuperDOT - direct to specialist
Settlement – three business days
Shares “In Street Name”. Shares kept
by the broker after a transaction
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Trading on OTC Markets
•Negotiated market
•No specialist
•NASDAQ computer system
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Nasdaq
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Market Structures in Other
Countries

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
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London - predominately electronic trading
Euronext – market formed by combination
of the Paris, Amsterdam and Brussels
exchanges
Tokyo Stock Exchange
Hong Kong Stock Exchange
Shanghai Stock Exchange
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Cost of Trading
Broker’s commissions:
Explicit
“Hidden” costs:
Bid-Ask Spread
Price Concession
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Cost of Trading
Impact of trading costs on returns
Return =
capital gains + current income - all broker ' s fees
initial investment + initial broker ' s fees
Cost of Trading
Example: You bought a stock for $70 and later sold it for $80
You received $8 in dividends, paid an initial broker’s fee of $1%
of purchase price, and paid another $1% of selling price when
you sold the stock. What is your return on this investment
(ignoring taxes)?
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Placing an Order
• Should you use a full-service or a
discount broker?
• What is the value of the full-service
broker’s advice?
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Student Loan



You think your value will go up
You want to make the most out of it
So you borrow money to finance education
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Buying on Margin
Borrow
to buy securities (make
use of the Broker call’s loan)
Securities
stay with the broker
as collateral
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Buying on Margin
Investor’s account:
Assets
Liabilities
Value of stocks purchased
Loan from Broker
Equity
Cost of setting up a margin strategy
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Buying on Margin
 At
time 0:
Initialinvestor's equity0
InitialMargin0 
Market val
ue of securities0
 At
any future time
Actualinvestor's equityt
ActualMargint 
Market val
ue of securitiest
Buying on Margin
• The Federal Reserve System sets
minimum initial margin
requirements currently 50%
• All exchanges set a minimum
maintenance margin requirement
currently around 30%
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Buying on Margin
Example: What is the initial margin if the investor purchases
100 shares of stock at $100 per share using $6,000 of her own
money and borrows the rest?
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Buying on Margin
Example (continued): If the value of the above stock fell to $70
per share, what is now the actual margin?
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Buying on Margin
Example (continued): If the value of the above stock fell to $50
per share, what is now the actual margin?
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Buying on Margin
Margin Call
Pmin= the lowest price a share can fall to without a call
L = the loan value
M = the margin requirement
N = the number of shares
Buying on Margin
Margin Call Example: An investor purchases 100 shares of
stock at $100 per share using $6,000 of her own money and
borrows the rest. If the maintenance margin is 30%, what is the
lowest price a share can fall without a call?
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Margin Trading - Initial Conditions
X Corp
50%
40%
1000
Initial Position
Stock $70,000
$70
Initial Margin
Maintenance Margin
Shares Purchased
Borrowed $35,000
Equity
35,000
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Margin Trading - Maintenance Margin
Stock price falls to $60 per share
New Position
Stock $60,000 Borrowed $35,000
Equity
25,000
Margin% = $25,000/$60,000 = 41.67%
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Margin Trading - Margin Call
How far can the stock price fall before a
margin call?
(1000P - $35,000)* / 1000P = 40%
P = $58.33
* 1000P - Amt Borrowed = Equity
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Problem 3, Chapter 3 (p. 93)
Dee Trader opens a brokerage account, and purchases 300 shares of Internet
Dreams at $40 per share. She borrows $4,000 from her broker to help pay
for the purchase. The interest rate on the loan is 8%.
a. What is the margin in Dee’s account when she first purchases the stock?
b. If the share price falls to $30 per share by the end of the year, what is the
remaining margin in her account? If the maintenance margin requirement is
30%, will she receive a margin call?
c. What is the rate of return on her investment
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Problem 7, Chapter 3 (p. 94)
You are bullish on Telecom stock. The current market price is $50 per share,
and you have $5,000 of your own to invest. You borrow an additional
$5,000 from your broker at an interest rate of 8% per year and invest
$10,000 in the stock.
a. What will be your rate of return if the price of Telecom stock goes up by
10% during the next year? (Ignore the expected dividend.)
b. How far does the price of Telecom stock have to fall for you to get a
margin call if the maintenance margin is 30% of the value of the short
position? Assume the price all happens immediately.
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Why buy on margin?
Borrowing magnifies ROE (risky strategy)
Return
on Equity ( ROE
income
) 
equity
income
Return on Total Investment ( ROA ) 
total investment
Leverage and ROE
ROE
RS  RL
RS
L
E
RS  RL
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Short Sales
Borrow Securities to sell them
Sell first -- then buy!
Margin is required (cost of short
selling)
Short position must be covered
Investor expects price to decline
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Short Selling
Original Stock Holder
100 Shares
Broker
100 Shares
Short Seller
100 Shares
New Stock Holder
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Short Sales
Return on
Short Sale

Short Sale Price  Buy Back Price
Per Share Investment
( margin )
Short Sales
Example: An investor sells short 100 shares of stock at $100
per share. The margin requirement is 50% of the short sale.
a. If the investor covers her short sale when the stock price
declines to $70 per share, what is the return on the short
sale?
b. What is the return if there is no margin requirement?
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Short Sales
Example: An investor sells short 100 shares of stock at $100
per share. The margin requirement is 50% of the short sale.
c. If the investor covers her short sale when the stock price
increases to $130 per share, what is the return on the
short sale?
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Short Sales-Initial Margin
Investor’s account at time 0:
Assets
Value of stocks sold ( P0  N )
Initial Margin (E0)
Liabilities
Value of Stocks owed (P0  N )
Equity (Current Margin)
Equity
Percentage Initial Margin=
Value of Stocks owed
As time elapses, the value of stocks owed changes, affecting
the %Margin!
Short Sales-Margin
Investor’s account at time t:
Assets
Liabilities
Value of stocks sold( P0  N ) Value of Stocks owed ( Pt  N )
Initial Margin (E0)
DIVIDENDS DUE
Equity (Et=Current Margin)
Percentage Margin=
Equity ( current margin)
Value of Stocks owed
As time elapses, the value of stocks owed changes,
affecting the %Margin!
Short Sales -Margin
How high can the price of stock go before a
margin call is issued?
Actual margin=
Equityt
P N  E0  Pt N
 0
Value of st ockowedt
Pt N
We want actual margin > required margin.
Solve for
Pt
Short Sales
Margin call price:
Pmax 
NP0  E0
N M  1
Pmax m axim umprice per share wit hout margin call
P0  price per share at t imeof short sale
E0  init ialmargin
N  number of sharessold short
M  margin requirement
Short Sales
Example: An investor sells short 100 shares of stock at $100 per
share. The initial margin requirement is 50% of the short sale. If
the maintenance margin is 30%, what is the maximum stock price
without a margin call on the short sale?
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Short Sale - Initial Conditions
Z Corp
50%
30%
$100
100 Shares
Initial Margin
Maintenance Margin
Initial Price
Sale Proceeds
$10,000
Margin & Equity
5,000
Stock Owed 10,000
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Short Sale - Maintenance Margin
Stock Price Rises to $110
Sale Proceeds
$10,000
Initial Margin
5,000
Stock Owed
11,000
Net Equity
4,000
Margin % (4000/11000)
36%
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Short Sale - Margin Call
How much can the stock price rise before a
margin call?
($15,000* - 100P) / (100P) = 30%
P = $115.38
* Initial margin plus sale proceeds
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Problem 4, Chapter 3 (p. 93)
Old Economy Traders opened an account to short sell 1,000 shares of
Internet Dreams from Question 3. The initial margin requirement was 50%.
(The margin account pays no interest.) A year later, the price of Internet
Dreams has risen from $40 to $50, and the stock has paid a dividend of $2
per share.
a. What is the remaining margin in the account?
b. If the maintenance margin requirement is 30%, will Old Economy receive
a margin call?
c. What is the rate of return on the investment?
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Problem 8, Chapter 3 (p. 94)
You are bearish on Telecom and decide to sell short 100 shares at the
current market price of $50 per share.
a. How much in cash or securities must you put into your brokerage
account if the broker’s initial margin requirement is 50% of the value of
the short position?
b. How high can the price of the stock go before you get a margin call if
the maintenance margin is 30% of the value of the short position?
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Regulations of Securities
Markets
Securities Act of 1933
Securities Exchange Act of 1934
Securities Investor Protection Act of 1970
Blue Sky Laws
Circuit Breakers
Main Concern: Insider Trading
Trading scandals and reactions: Sarbanes-Oxley Act
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Summary
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Issuing securities
Trading
Buying on margin and short sales
Next class: Mutual Funds
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