Capital Markets Course 10. X. Trading on the exchange market Exchange market trades = all buying or selling contracts for securities or other assets on.

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Presentation transcript:

Capital Markets Course 10

X. Trading on the exchange market Exchange market trades = all buying or selling contracts for securities or other assets on the exchange markets Function of the contract ending moment - immediate ending contracts - normal ending contracts - term contracts Function of the broker account - cash - margin Function of the transaction purpose: - simple trading - arbitrage - speculation - hedging - technic

X. Spot trading Transactions spot or cash The trader must pay the bought securities or must deliver the sold securities Markets: - Regular - Odd Lot - Technical markets: - Buy In - Sell Out

X. Margin trading Buying on margin or short selling Spot transaction with credit from the broker Advantage: additional financing capacity The broker charge an interest rate Margin account Securities are maintained as a collateral for the loan The transaction is marked to the market

X. Buying on margin Margins: - Initial Margin - Maintenance margin - Current margin Function of the report between the current and the initial margin, the account can be: - no restricted - restricted

X. Buying on margin An investor is buying 100 shares on market price of 15, with an initial margin of 50% Transaction value = 15*100 = Margin = 0,5 *1.500 = 750 Debt on broker = 750 a) Price is 20 Shares value = 20 * 100 = Account balance = 2000 – 750 = Current margin = / = 62,5% a.1) profit is cashed Shares value = 20 * 100 = Own equity = 50% * = Debt on broker = 50% * = a.2) new shares are bought The investment amount = 250 / 50% = 500  Are bought= 500 /20 = 25 shares Shares value = 20 * 125 = Own equity = Debt on broker = 50% * = 1.250

X. Buying on margin b) Price is 14 Shares value = 14 * 125 = Debt on broker =1.250 Account balance = – = 500 Current margin = 500 / = 28,57% b.1) the investor answer to the margin call Own capital = 50% * = 875 b.2) the investor don’t answer to the margin call Debt on broker = Own equity = 500 Shares in total value of 750 will be sold  750 / 14 = 53,57 ~ 54 shares Shares value = (125 – 54) * 14 = 71 * 14 = 994 Debt on broker = Own equity = 50% * 994 = 497

XI. Term contracts The details are established today, but the transaction ends in the future Term contracts: - Binding - Conditional For the most liquid securities on the market: standard contracts

X. Review ! Capital market instruments: primary (shares, bonds, rights); derivates (futures, options, CFD); ssynthetics (indexes) ! Transaction: spot (cash, margin); term (futures, forward, options) ! Exchange markets transactions (futures, options); negotiation (forward, options)

Bibliography Anghelache G. (2004), Piaţa de capital. Caracteristici. Evoluţii. Tranzacţii, Editura Economică, Bucureşti Bodie, Z., A. Kane, and A. J. Marcus (2007), Essentials of Investments, 6th edition, McGraw Hill International Edition