Transcript Chapter 4 The Role of Securities Markets

Chapter 4
The Role of Securities
Markets
Security Markets
• Organized exchanges
–NYSE and the AMEX
–The listing of securities
• Over-the-counter markets (e.g.,
Nasdaq)
Market Makers - Security
Dealers - Specialists
• Offer to buy and sell for their own
accounts
• The spread - the difference between
the bid and ask prices
Market Makers
–Do not set the level of prices
–Facilitate security transactions
Buying and Selling Securities
• The role of brokers
–full service brokerage firms
–discount brokers
–electronic trading
• The difference between
–a broker
–a security dealer
Security Transactions
The reporting of transactions
52 Wks
High
Low
Stock
Divid
end
Yield
P/E
Sales
100s
High
Low
Close
Net
Chng
64
32
EMEC
0.88
1.9
20
18151
47
46
46.5 -0.50
Types of Orders
• Market orders
–Assured transaction
• Limit orders
–Specified price
–Transaction may not occur
Settlement
• Confirmation statements
• T + 3: Settlement date
• Delivery versus holding securities
in street name
The Cost of Investing
• Commissions
–Full service brokers
–Discount brokers
–On-line brokers
• The spread
Cash Versus Margin Accounts
• Leveraging the position
• Increased potential return
• Increased risk
Margin Requirements
• Initial margin requirement
• Margin call
Long and Short Positions
• The long (bullish) position
–Anticipating prices rising
• The short (bearish) position
–Anticipating prices falling
The Short Sale
• Sale of borrowed securities
• To close position:
–Purchase the stock and return
the borrowed securities
Measures of Security Prices
• Dow Jones Industrials
• S&P 500 Stock Index
• New York Stock Exchange Index
Construction of Indices
• Questions concerning:
–What securities to include
–How index is computed
• Can produce different measures of
stock performance
Price Movements and Graphs
• How stock prices appear to have
changed is affected by the
presentation
• Impact of absolute and relative
scales
Dow Jones Industrial Average
Absolute Scale
Relative Scale
Price Movements and Graphs
Absolute Scale
Dow Jones Industrial Average
Additional Aggregate
Measures of the Stock Market
•
•
•
•
Russell 1000
Russell 2000
Russell 3000
S&P 400
MidCap
• S&P 600
SmallCap
• S&P 1500
• Nasdaq Index
• Wilshire 5000
Index
Regulation - The Federal
Security Laws
• Full disclosure laws: Importance of
information
–10-K report
–The annual report
• Illegal use of inside information
The Securities and Exchange
Commission (SEC)
• Enforces the federal security laws
–New issues
–Trading in securities
• Can suspend trading
The Securities Investor
Protection Corporation
• Insures accounts against failure by
brokerage firms
• Similar to FDIC
• Brokerage firms may carry
additional insurance
Foreign Securities
• Foreign stocks traded in American
markets
• American Depository Receipts
(ADRs)
–Avoids the problem of language
–Expressed in dollars and not the
local currency
–Registered with the SEC
Efficient Markets
• Easy entry and exit
• Information disseminated rapidly
• Price change occur quickly
Efficient Markets
Efficient Market Hypothesis
• Current price properly values a
stock
• Cannot expect to consistently out
perform
Efficient Market Hypothesis
• Empirical results supports the
hypothesis
• Exceptions “anomalies” to efficient
market hypothesis