Securities Market Investments and Portfolio Management MB 72

Outline  Meaning of Financial Markets  Role of Financial Markets  Types of Financial Markets –Primary Markets –Secondary Stock Exchanges Over-the-Counter Market Third and Fourth Market  Mechanics of Trading –Types of Orders –Margin Trading

Financial Markets  A place where borrowers and lenders are brought in contact with one another  Help in allocation of scarce resources in the economy  Channeling savings into investments  Provide an economy’s link with the future

Primary Markets  New issues market which brings together the supply and demand or sources and uses for new capital funds  A market where securities are issued for the first time  contributes directly to capital formation  any increase in primary market activity leads to more investment, more capital formation

Secondary Market  Deals in existing securities; market for buying and selling of existing securities  does not directly contribute to capital formation  increase in volume of business in the secondary market does not mean more capital formation  Indirectly helps in capital formation  Secondary markets can be classified as: –Auction Markets –Negotiated Markets  Stock Exchanges are classified as auction markets  Over-the-Counter Market  What is a third market?  What is a fourth market?

Mechanics of Trading  Open a brokerage account –cash account –margin account  Types of Orders –Market order buy/sell securities at the best available price in the market –limit order specifies a particular price to be met or bettered –stop order specifies a certain price at which a market order is to take over

Margin Trading  A customer can pay part of the total amount due and borrow the remainder from the broker, who in turn typically borrows from a bank to finance customers.  Margin is that part of a transaction’s value that a customer must pay to initialize the transaction. It is part of the total value of the transaction that cannot be borrowed from the broker.  What is initial margin? –Part of a transaction’s value that a customer must pay to initialize a transaction  What is maintenance margin? –Minimum amount needed in the investors account at all times as compared to the market value  What is margin call? –A margin call is issued when the actual margin declines below the maintenance margin

Market Value of securities minus Amount Borrowed Actual Margin = Market Value of Securities