1. 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.

2. 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

3. 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

4. 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.

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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.