1. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
CHAPTER 13
Common Stock Market: I
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2. Overview of Trading Locations in the U.S.
There are two basic types of trading in the secondary market for equities
Organized exchanges (also called physical exchanges) which are specific geographic locations called trading floors, where buyers/sellers meet
The trading mechanism is the auction system
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3. Overview of Trading Locations in the U.S. (continued)
over-the-counter (OTC) trading (also called OTC markets), which results from geographically dispersed traders or market makers electronically linked to one another
The trading mechanism is a negotiated system whereby buyers negotiate with sellers
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4. Overview of Trading Locations in the U.S. (continued)
Major national stock exchanges
New York Stock Exchange (NYSE) (about 2000 listed companies) Big Board
American Stock Exchange (AMEX) (about 700 listed companies) Curb
The major OTC market is Nasdaq (more listed companies than NYSE but less market capitalization)
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5. Overview of Trading Locations in the U.S. (continued)
Practical categorization of traded stocks
Exchange listed stocks
Nasdaq listed OTC stocks
Non-Nasdaq OTC stocks
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6. Overview of Trading Locations in the U.S. (continued)
Four major types of markets on which stocks are traded
First Market: trading which occurs on organized, physical exchanges
Second Market: trading in the OTC market of stocks not listed on an exchange
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7. Overview of Trading Locations in the U.S. (continued)
Four major types of markets on which stocks are traded
Third Market: trading of listed stocks in the OTC market
Fourth Market: institutional transactions which occur without an intermediary or exchange
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8. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Stock Exchanges
listed stocks are those that are traded on exchanges
The right to trade securities or make markets on an exchange floor is granted to individuals or firms called a member, who buys a seat on the exchange
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9. Stock Exchanges (continued)
stocks that are listed on regional exchanges are
stocks that could not qualify for a national exchange
dual listed stocks, which are listed on both regional and national exchanges
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10. Stock Exchanges (continued)
New York Stock Exchange
The majority of members are designated commission brokers, and they execute trades on behalf of clients via the specialist structure
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11. Stock Exchanges (continued)
Commission broker, an employee of one of the nearly 500 securities houses
Independent floor brokers execute orders for other exchange members who have more orders than they can handle alone
Registered traders individual members who buy and sell for their own account
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The OTC Market
The OTC Market
The OTC market trades unlisted stocks
Dealers make markets in stocks and trade with each other and with retail customers
Bid-ask spreads are the main source of dealer profits
The National Association of Securities Dealers (NASD) regulates the market
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13. The OTC Market (continued)
NASDAQ Stock Market
The Nasdaq (National Association of Securities Dealers Automated Quotations founded in 1971) is an ECN (electronic communication network) which links thousands of geographically dispersed market-making participants and member-dealers across the country
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14. The OTC Market (continued)
NASDAQ Stock Market
The Nasdaq is divided into two tiers
Nasdaq National Market System (NNM)
approximately 3600 stocks traded on the NNM
Small Capitalization Market
approximately 800+ stocks traded on the Small Cap Market
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15. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
The Third Market
Third market is the trading of listed exchange stocks in the OTC market, by dealers (not members of an exchange)
Dealers that make markets in the third market operate under the regulatory jurisdiction of the NASD
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16. Other Types of Common Stock Trading
Offshore Trading
Broker/dealers may trade exchange listed or Nasdaq equities offshore via foreign exchanges or trading desks
Such transactions must be reported to the U.S. marketplace the next day.
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17. Other Types of Common Stock Trading (continued)
Rule 144A Securities
Allows trading of nonfungible unregistered securities among qualified institutional buyers (QIB) by creating a “safe harbor” from SEC registration requirements
QIBs are institutions with $100 million invested in securities
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18. Other Types of Common Stock Trading (continued)
American Depository Receipts
(ADRs) are negotiable certificates in registered form, issued in the United States by a U.S. bank, which certify that a specified number of foreign shares have been deposited with an overseas branch of the bank that acts as a custodian in the country of origin.
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19. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
The Role and Regulation of Dealers in Exchange and OTC Markets (continued)
Regulation FD (Full Disclosure)
In 2000, corporations were restricted from providing disclosure to only select groups of market participants
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20. Trading Stocks Outside the Country Where Domiciled
Global Depositary Receipts
When shares are issued in other markets, banks issue documents which represent those securities
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21. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
Summary
Common stock represents ownership or equity on a corporation
Secondary trading occurs either on the NYSE, the AMEX, five regional exchanges and the OTC
Listing of international shares (GDR’s, ADR’s) reduces financing costs and broadens ownership
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