1. Basic Finance Securities Markets4
An introduction to financial institutions, investments & Management
Eleventh Edition By
Herbert B. Mayo

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

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

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

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

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

7. Confirmation Statement

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

9. 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

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

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

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

13. 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

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

15. 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

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

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

18. Efficient Market Hypothesis

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