Trading in Secondary Equity Markets MFIN 403 Financial Markets and Institutions

Trading in Secondary Markets Istanbul Stock Exchange (ISE) Founded in 1986, mainly for stock trading. Autonomous, independent budget. Generates revenues from fees charged on transactions and listing fees. Not-for-profit.

ISE Listing Requirements Three years of audited financial statements Profits > 0 during the 2 years prior to listing Shareholder’s equity > YTL 13 million Meet pre-determined current and expected trading volume levels Other legal requirements…

Delisting from ISE Large annual losses and accumulated losses Financial distress, default of debt payments Loss of 2/3 of capital Market value < Book value Substantial declines in trading volume Failure to comply with disclosure rules Declaration by auditors of wrong doing Insider trading, leaking information Any other material negative news…

Disclosure Requirements Independently audited financial statements: For the fiscal year (within 10 weeks of the end of fiscal year) For the first half (6-month) of fiscal year (within 6 weeks of the end of the 6 month period) Unaudited financial statements: For the first 3-month and 9-months of the fiscal year (within 4 weeks of the end of accounting period) Need to follow the disclosure guidelines by the SPK.

Major ISE Indices CODE INDICES BASE DATE AND VALUE XU100 ISE NATIONAL 100 Jan. 1986 = 1 XU050 ISE NATIONAL 50 Dec.28, 1999=15,208.78 XU030 ISE NATIONAL 30 Dec.27, 1996=976 XYUZO ISE NATIONAL 100-30 Dec.31,2008=26,864.07 XKURY ISE CORPORATE GOVERNANCE Aug.29, 2007 =48,082.17 XTUMY ISE NATIONAL ALL-100 XUTUM ISE NATIONAL ALL SHARES XUSIN ISE NATIONAL INDUSTRIALS Dec.31, 1990 = 32.56

Calculation of ISE market indices   n Σ i=1  ISE Indext  = Pit * Nit * FWit  Dt Pit = The closing price of the stock 'i' at period 't' Nit The total number of shares outstanding of the stock ‘i' at period ‘t' (=Paid-in capital) FWit The flotation weight (the ratio of stocks registered as tradable by Central Registry Agency ) of the stock ‘i' at period ‘t' Dt The value of divisor at period ‘t' (Adjusted base market value) n Total number of stocks included in the index.

A simple index return calculation Stock Initial Price Ending Price Return Total shares outstanding (in millions) Initial Market capitalization (in millions) Final Market capitalization (in millions) A $25 $40 60% 300 $7,500 $12,000 B $50 $65 30% 400 $20,000 $26,000 C $75 $60 -20% 200 $15,000 What is the return on the value-weighted market index? What about the return on equal-weighted and price-weighted indices?

Trading costs 1. Brokerage fees (depend on what type of broker you have) Full service brokerage firms (provide investment advice, e.g. JP Morgan) Discount brokerage firms (minimum service, low trading cost, e.g. Charles Schwab) Online brokers (e.g. Ameritrade, E-Trade) 2. The small investor typically buys at the ask price and sells at the bid, so round trip trading costs must include the bid-ask spread.

What determines bid-ask spread? Trading volume. Volatility. Probability of facing a trader with inside information. Collusion!

Types of trade orders 1) Market order: An order from an investor who wants to trade at the best possible price currently available in the market. Almost guarantees execution Trading commissions will be lower compared to limit orders If the market moves fast, execution price may be worse than the price when order was given

Types of trade orders 2) Limit order: An order in which an investor specifies a price to buy/sell. While a market order will be executed immediately, a limit order may or may not be executed depending on whether the market price gets to the level investor specified. May never be executed Trading costs will be relatively higher Avoids trading at a price much different than the price you have in mind

Types of trade orders 3) Stop-loss orders: A stop-loss order to buy says that if the stock price goes above a certain level then buy the stock. This is typically used to protect profits from short selling. A stop-loss order to sell says that of the stock price falls below a certain level then sell the stock. The advantage of a stop order is you don't have to monitor how a stock is performing on a daily basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock's price. Another disadvantage is, once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price, especially in a fast-moving market where stock prices can change rapidly. An investor can avoid the risk of a stop order not guaranteeing a specific price by placing a stop-limit order.

Trading orders: Examples The closing price of ABC on Monday 8/30/2004 was $74.25. A limit order to buy ABC stock at $74 (=buy if the price of ABC falls to $74 or below) b) A stop-loss order to buy at $75 (=buy if the price of ABC rises to $75 or above) c) A limit order to sell at $75 (=sell if the price of ABC rises to $75 or above) d) A stop-loss order to sell at $74 (=sell if the price of ABC falls to $74 or below)