Organization and Functioning of Securities Markets Objectives: What is the purpose and function of a market? What are the characteristics that determine the quality of a market? What is the difference between a primary and secondary capital market and how do these markets support each other? How can margin transactions be utilized by investors.

What is a market? Brings buyers and sellers together to aid in the transfer of goods and services Does not require a physical location Both buyers and sellers benefit from the market

Characteristics of a Good Market Availability of past transaction information must be timely and accurate Liquidity marketability Low Transaction costs Rapid adjustment of prices to new information

Organization of the Securities Market Primary markets Market where new securities are sold and funds go to issuing unit Secondary markets Market where outstanding securities are bought and sold by investors.

Why Secondary Financial Markets Are Important Provides liquidity to investors who acquire securities in the primary market Results in lower required returns than if issuers had to compensate for lower liquidity

Margin Transactions On any type order, instead of paying 100% cash, borrow a portion of the transaction, using the stock as collateral Regulations limit proportion borrowed Margin Changes in price affect investor’s equity

Margin Transactions Buy 200 shares at K50 = K10,000 position Borrow 50%, investment of K5,000 If price increases to K60, position Value is K12,000 Less - K5,000 borrowed Leaves K7,000 equity for a K7,000/K12,000 = 58% equity position

Margin Transactions Buy 200 shares at K50 = K10,000 position Borrow 50%, investment of K5,000 If price decreases to K40, position Value is K8,000 Less - K5,000 borrowed Leaves K3,000 equity for a K3,000/K8,000 = 37.5% equity position

Margin Transactions Initial margin requirement at least 50%. Set up by the Fed. Maintenance margin Requirement proportion of equity to stock Protects broker if stock price declines Minimum requirement is 25% Margin call on undermargined account to meet margin requirement If margin call not met, stock will be sold to pay off the loan

END OF SECTION QUESTIONS Q1. You purchased 1000 shares of common stock on margin at K30 per share. Assume the initial margin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of K24? Ignore interest on margin Q2. You want to purchase XYZ stock at K60 from your broker using as little of your own money as possible. If initial margin is 50% and you have K3000 to invest, how many shares can you buy? Q3. You purchased 100 shares of ABC common stock on margin at K70 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin.