Basic Finance Securities Markets

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Presentation transcript:

Basic Finance Securities Markets 4 An introduction to financial institutions, investments & Management Eleventh Edition By Herbert B. Mayo

Market Makers Dealers offer to buy and sell for their own accounts The spread - the difference between the bid and ask prices

Market Makers Facilitate securities transactions Do not set the level of prices Prices determined by supply and demand for the securities

Buying and Selling Securities Role of brokers full service brokerage firms discount brokers electronic trading Difference between a broker a securities dealer

Types of Orders Market orders Limit orders Executed at the current bid or ask Assured transaction Limit orders Specified price Transaction may not occur

Settlement Confirmation statements for transactions T + 3: Settlement date Securities are held (registered with) by the brokerage firm (“street name”)

Confirmation Statement

The Cost of Investing Commissions The spread Full service brokers Discount brokers On-line brokers The spread

Margin Accounts Buying with a combination of the investor’s funds and borrowed funds Leveraging the position Increased potential percentage return or loss Increased risk

Margin Requirements Initial margin requirement Margin call Established by the Federal Reserve Margin call

Long and Short Positions Long (bullish) position Anticipates prices rising Short (bearish) position Anticipates prices falling

The Short Sale Sale of borrowed securities Contract for future delivery To close position: Purchase the stock and return the borrowed securities

Examples of Measures of Securities Prices Dow Jones Industrial Average S&P 500 Stock Index New York Stock Exchange Index Nasdaq Index Wilshire 5000 Russell 1000

Construction of Indices Questions concerning: What securities to include How index is computed Can produce different measures of stock performance

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

Competitive and Efficient Markets Easy entry and exit Information disseminated rapidly Price changes occur quickly

Efficient Market Hypothesis Current price properly values a stock Cannot expect to consistently out perform

Efficient Market Hypothesis

Efficient Market Hypothesis Empirical results supports the hypothesis Exceptions “anomalies” to efficient market hypothesis

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