1. PowerPoint to accompany Stock Market & Market Indices

2. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Types of Markets  Stock Exchanges Trading of stocks listed in an exchange  OTC Trading Trading ‘over the counter’ or outside a stock exchange, in dealer networks  ECNs Electronic Communication Network is an electronic system that allows order execution between exchanges and dealer networks

3. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Trading Mechanics  Types of orders  Short selling  Buying on the margin

4. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Types of orders  Instructions from investors to brokers  Market order  buy/sell order to be executed at best price -- get lowest price for buy order -- get highest price for sell order  market orders given priority in trading  no guarantee of execution price

5. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Types of orders  Limit order  buy/sell order where investor specifies price range  “buy at $50 or less”  “sell at $52 or more”  investor sets reservation price but no guarantee that limit order will be executed

6. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Types of orders  Stop order  order lies dormant  turns into market order when certain price (“the stop”) is reached  “buy if price rises to $60”  “sell if price falls to $58”  investor does not have to watch market but in a volatile market stop could be triggered prematurely

7. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Types of orders  Stop limit order  Turns into limit order when stop is reached  “buy if price rises to $60, but only is executed at $65 or less”  “sell if price falls to $58, but only is executed at $55 or more”

8. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition How long is an order good?  IOC (Immediate or Kill)  FOK (Fill or Kill)  Day (Only on current day)  GTD (Good till Date)  GTT (Good till Time)  GTC (Good till Cancelled)  OPG (participate in Opening Auction only)

9. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Order Size  Round lots  lots of 100 shares  Odd lots  less than 100 shares  more difficult to trade  Block trades  10,000 shares or $200,000 value

10. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Short Selling  Sale of borrowed stock  Profit from belief that stock price is too high and will fall soon  borrow stock through broker  sell stock  buy and return later  Short selling could further destabilize falling prices

11. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Short Selling  Short sales allowed if  uptick or zero uptick in price for previous trades:  $20, $21 (uptick)  $20, $20, $21 (zero uptick)  $21, $20 (downtick)

12. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Buying on the margin  Buyer borrows part of purchase price of stock, using stock as collateral  borrow at call money rate/PLR  SEC sets initial margin requirement  Currently 50% of stock holding

13. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Buying on the margin  If stock price falls  collateral worth less  if collateral worth only 125% of loan (maintenance margin) -- margin call -- owner must put up more cash or sell stock  margin calls can worsen stock crash

14. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Buying on the margin Problem:  1000 shares, $20 per share out of which 50% is bought on margin  Leverage  gains/losses on $20,000 capital  but tied up only $10,000 capital  If prices falls to $12 the value of stock is $12,000. This is below 125% of $10,000 loan. Therefore we will get a margin call

15. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Stock market indicators  Measure average performance of a group of stocks  The group of stocks can include the entire market or an entire sector or a selection of stocks based on some criteria

16. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Stock Exchange index Includes all stocks listed on exchange  NYSE Composite All stocks listed in the New York Stock Exchange  Nasdaq Composite All stocks listed in the Nasdaq Stock Exchange  ASPI All stocks listed in the Colombo Stock Exchange

17. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Ltd) – 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1 st edition Subjectively selected index Organization picks group of stocks according to various criteria  Dow Jones Industrial average 30 largest industrial stocks in U.S. that are generally the leaders in their industry.  S&P 500 500 largest stocks based on market capitalization in the U.S. stock market  S&P SL 20 20 largest stocks based on market capitalization in the Colombo Stock Exchange