Transcript Chapter 18
Chapter 18
COMMON STOCK
MARKETS IN THE
UNITED STATES
Characteristics of
Common Stock
Equity securities = ownership share of a
corporation.
Common (junior) stockholders are the
residual owners:
Right to income
Right to assets
Preferred (senior) stockholders have
preference over common stockholders:
Right to fixed dividend
Trading Locations
Stock Exchanges
trading floors
auction system / open-outcry
central auction specialist system
Over-The-Counter Market
no trading floor
negotiated system
multiple market maker system
Independent Electronic Trading Systems
(US) Stock Exchanges
Major National Stock
Exchanges
NYSE or Big Board
AMEX or ASE or Curb
Regional Stock
Exchanges
Boston, Chicago,
Cincinnati, San
Francisco, Philadelphia
OTC Market
NASDAQ
NASD
Stocks can be duallisted
Types of Markets
First Market
trading on exchanges of stocks listed on an exchange
Second Market
trade in OTC market of stocks not listed on exchange
Third Market
trading in OTC market of stocks listed on an
exchange (deregulation helped: needn’t be member)
Fourth Market
private transactions between institutional investors
e.g. B.S.E.
Exchanges (1st mkt)
Formal organizations approved and
regulated by the SEC
Members
can only trade listed stocks
must buy a seat on the exchange (member)
Listing requirements (initial, continued):
minimum capitalization, shareholder equity,
average closing share price, etc.
NYSE
Centralized
continuous auction
Exchange
participants:
single specialist/stock
(market maker)
(commission) brokers
indie floor brokers
(spill over)
registered traders
SuperDot
Major roles of NYSEspecialist
Auctioneer: buy/sell
on own account at
stated price
Agent / broker
Dealer (own account)
Catalyst: focal point
Commissions: dereg’d
OTC Market (2nd, 3rd)
Trading unlisted
NASDAQ market
stocks
makers
But: listing
Other OTC markets
requirements
(80k)
OTC Bulletin Board
NASDAQ stock market
Pink Sheets
(virtual, 5k)
NASDAQ market tiers
NASDAQ National
Market
Small Cap Market: can
graduate to NNM
Fourth Market
Direct trading of stocks between two
customers (no intermediary)
Commissions avoided
Alternative trading systems (ATS)
electronic communications networks (30% of
NASDAQ volume; no brokers)
crossing networks (aggregate orders across
institutions by computer)
Trading Mechanisms
Types of Orders
market order
limit order
Automatic thresholds
Short Selling
Borrow #stocks, not their
price
Margin Transactions
Buy on margin: use shares
as collateral
initial margin
maintenance margin
Transactions Costs
(time trade to minimise
these)
explicit costs
Fees, taxes…
implicit costs
Impact: changes p
Timing: if slow trade
Opportunity: if trade
cancelled
Trading Arrangements for
Institutional Investors
Block Trading
Trades of 10,000 shares or more of a given stock or
trades with a market value of $200,000 or more.
NYSE: 1961 3%; now > 50%
Upstairs market: broker may avoid exchange, OTC
Program Trading
Simultaneous computer-assisted buy/sale shares in a
large number of different stocks for:
Rebalance portfolio (asset allocation)
Index arbitrage (e.g. all S&P500 firms)
Stock Market Indicators
Dow Jones Industrial Average (30 largest
NYSE ‘blue chip’)
NYSE Composite (all NYSE)
NASDAQ Composite (all NASDAQ OTC)
S&P 500 (500 NYSE listed + OTC)
AMEX
Value Line Composite Average
Pricing Efficiency of the
Stock Market
Forms of Efficiency
Weak form: can’t predict from market history
Semistrong form: + `from public info’
Strong form: + ‘from private info’
but: insider traders often earn abnormal returns
Implications for Investing in Common
Stock
Active strategies: try to outperform market
Passive strategies: buy market at min. cost
Stock Market Indexes
Japan
Tokyo Stock Price
Index (TOPIX)
Nikkei 225 Stock
Average
United Kingdom
Financial Times-Stock
Exchange 100 (FTSE
100)
Germany
Deutscher Aktienindex
(DAX)
France
CAC 40
Others
Hang Seng Index
Morgan Stanley EAFE
Index