Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 3 How Securities are Traded

3-2 Securities Markets Primary market: New issue Secondary market: Existing owner sells to another party Initial Public Offerings –Evidence of “underpricing” –Subsequent underperformance

3-3 Types of Orders Market order (MO): buy or sell at the best price now available Limit order (LO): buy or sell at the stated price or better. Normally, a LO: –To buy is below the market price –To sell is above the market price

3-4 Example of Limit Order You own a stock that is trading at $50. You are willing to buy more at a price of $40 and you are willing to sell at a price of $60. Enter a LO to $40. Enter a LO to $60. If the mkt price drops to $40, you will buy, if it increases to $60, you will sell.

3-5 Types of Orders: Stop Order Stop (or stop loss) order: –To sell is normally to close a long position and price is below market. –To buy is normally to cover a short position, and price is above market.

3-6 Example of Stop Order You buy a stock when the price is $50. You are not willing to lose more than $10 per share. Enter a stop loss order to $40. If the mkt price drops to $40, it becomes a market order and will be sold.

3-7 Order Size Block trade: 10,000 share minimum Round lot: 100 shares Odd lot: less than 100 shares Block trades account for about 20% of shares traded; odd lot trades are less than 5%.

3-8 Trading Mechanisms Dealer markets (NASDAQ) Electronic communication networks (ECNs) Specialists markets (NYSE)

3-9 Trading Costs Commission: fee paid to broker for making the transaction Spread: cost of trading with dealer –Bid: price dealer will buy from you –Ask: price dealer will sell to you –Spread: ask - bid Combination: on some trades both are paid

3-10 Buying on Margin Investing on margin is purchasing securities with borrowed funds. In margin transactions, margin refers to the investor’s equity in the position.

3-11 Stock Margin Trading Margin is currently 50%; you can borrow up to 50% of the stock value –Set by the FRS Maintenance margin: minimum amount equity in trading can be before additional funds must be put into the account Margin call: notification from broker that you must put up additional funds

3-12 Short Sales Purpose: to profit from a decline in the price of a stock or security Mechanics Borrow stock through a dealer Sell it and deposit proceeds and margin in an account Closing out the position: buy the stock and return to the party from which it was borrowed