Transcript ch04.ppt
Chapter 4
Securities Markets
Learning Objectives
Compare primary and secondary markets.
Equity markets - organization and
operations
Define third and fourth markets.
Major stock market indicators.
Bond and derivatives markets.
Change in the securities markets
Importance of Financial Markets
Financing government and firm projects
Channel funds from savers to borrowers
Provide a place where investors can act on
their beliefs
Help allocate cash to where it is most
productive
Help lower the cost of exchange
Primary Markets
New securities are issued in a primary market
Initial public offering (IPO) versus “seasoned”
new issue
IPO – Common stock shares of a company being sold
for the first time
Issue facilitated by investment dealers
Specialists in advice, design, and sales
Intermediaries between issuer and investor
Investment Dealers
Client advice includes type and features of
security, offer price, and timing of sale
Underwriting services: Risk of selling to
investors assumed from issuer
Coordinate marketing by helping issuer
register securities, issue prospectus, and sell
securities
Underwriting Process
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The issuing company sell the securities to
the financing group which consists of one
or two firms
The financial group sells the securities to
the marketing group at a “draw down”
price
The securities are distributed for sale to
the public
Issuance of Securities
Prompt Offering Qualification (POP) System
allows senior reporting issuers to sell new
securities over time via “short form”
prospectuses
Reduces issuance cost
Listing process
Global security issues
A private placement means new securities are
sold to a small group of institutional investors
Registration not required
Secondary Markets
Markets where investors trade previously
issued securities
Auction markets involve bidding in a
specific physical location
Brokers represent investors for a fee
Others trade for their own account
Negotiated markets consist of decentralized
dealer network
Stock Exchanges
Toronto Stock Exchange (TSX) is a
secondary auction market for equity
securities
Largest Canadian stock market
Listing requirements for traded firms
TSX Venture Exchange is Canada’s
“junior” stock market
New York Stock Exchange (NYSE) is the
largest secondary market in the world
Stock Exchanges
Formal organizations approved and regulated
by the SEC (or the provincial securities
commissions such as the OSC in Canada)
Members
Can only trade listed stocks
Must buy a seat on the exchange
Listing requirements
minimum capitalization, shareholder equity,
average closing share price, etc.
NYSE
Centralized continuous auction market
Exchange participants
SuperDot
Major roles of NYSE specialist
single specialist
commission brokers
independent floor brokers
registered traders
Dealer
Agent
Catalyst
Auctioneer
Commissions
Over-the-Counter (OTC) Markets
Network of dealers standing ready to either
buy or sell securities at specified prices
Dealers profit from spread between buy and
sell prices
Handle unlisted securities
Canadian OTC stocks are trading on the TSX
Venture Exchange
US OTC Market: NASDAQ
Over-the-Counter (OTC) Markets
Trading unlisted stocks
Listing requirements
Nasdaq stock market
Nasdaq market tiers
Nasdaq National Market (3,600 co.’s)
Small Capitalization Market (850 co.’s)
Nasdaq market makers
Other OTC markets (8,000 co.’s)
OTC Bulletin Board
Pink Sheets
Third and Fourth Markets
Third Market: Over-the-counter transactions
in securities listed on organized exchanges
Fourth market: Trading network among
investors interested in buying and selling
large blocks of stock
Brokers, dealers bypassed so costs are low
Electronic or telephone network
Trading
After-Hours Trading: Electronic
Communications Networks (ECNs) allow
investors to trade after exchange hours (4 to
8 P.M. EST, and sometimes early in the
morning)
In-House Trading: this new trend has
significant implications for the NYSE
International Equity Markets
Toronto Stock Exchange is the eighthlargest stock exchange in the world
Many different equity markets exist
Emerging markets
Generally less regulation and standardization of
trading activity
Risks: Illiquidity, lack of information, political
uncertainty
Equity Market Indicators
Provide a composite report of market
behavior on a given day
S&P/TSX Composite Index
Market value weighted
In 2004, comprised of 223 companies
representing almost 70 per cent of the market
capitalization
S&P/TSX 60 Index
Designed to mimic the performance of the
S&P/TSX composite Index
Equity Market Indicators
Dow Jones Industrial Average (DJIA)
S&P 500 Composite Index
Composed of 30 “blue-chip” stocks
Price weighted
Composed of 500 “large” firm stocks
Market value weighted
Nikkei 225 Average
Price weighted index of 225 actively-traded
stocks on the Tokyo Stock Exchange
Bond Markets
Secondary bond market is primarily an
over-the-counter network of dealers
Government of Canada bonds actively trade in
dealer markets
Corporate bonds are not as actively traded as
government issues
Market Developments
Growth of institutional trading
Block trading of stocks (transactions of at least
10,000 shares)
Affects market structure and operation
Negotiated, not fixed, commissions
Globalization of securities markets
24-hour trading
Instinet
Stock Market Indexes
S&P/TSX Composite Index
Pit Qit
S & P / TSX
(k )
PibQib
Dow Jones Industrial Average
DJIAt Pit / n
*
Price Weighted
Arithmetic average of current prices
Assumes you purchase an equal number
shares of each stock represented in the index
e.g., DJIA, Nikkei 225
Problems:
Must adjust denominator downward for
splits
Stocks with higher prices have greater
influence
PWI = [ of stock prices ] / [number of
stocks in index]
Value Weighted
Total value (mkt. cap.) of all stocks in the
index
Assumes you make a proportionate
market value investment in each company in
the index
e.g., S&P 500/ NYSE indexes
Problem: Market Cap., impact on index
MVW = [ (Price today) (number of shares) /
(Price base) (number of Shares)] (Index
Value BEG)
Equal Weighted
Unweighted index (e.g. Value-Line
Composite Average, Financial Times Index –
LSE)
Assumed the investor makes an equal
dollar investment in each stock in the index
Geometric average or arithmetic average
Problem:
GA leads to downward bias since GA<AA