1. Chapter 18 COMMON STOCK MARKETS IN THE UNITED STATES

2. Characteristics of Common Stock zEquity securities = ownership share of a corporation. zCommon (junior) stockholders are the residual owners: yRight to income yRight to assets zPreferred (senior) stockholders have preference over common stockholders: yRight to fixed dividend

3. Trading Locations zStock Exchanges ytrading floors yauction system / open-outcry ycentral auction specialist system zOver-The-Counter Market yno trading floor ynegotiated system ymultiple market maker system zIndependent Electronic Trading Systems

4. (US) Stock Exchanges zMajor National Stock Exchanges yNYSE or Big Board yAMEX or ASE or Curb zRegional Stock Exchanges yBoston, Chicago, Cincinnati, San Francisco, Philadelphia z OTC Market yNASDAQ yNASD z Stocks can be dual- listed

5. Types of Markets zFirst Market ytrading on exchanges of stocks listed on an exchange zSecond Market ytrade in OTC market of stocks not listed on exchange zThird Market ytrading in OTC market of stocks listed on an exchange (deregulation helped: needn’t be member) zFourth Market yprivate transactions between institutional investors ye.g. B.S.E.

6. Exchanges (1 st mkt) zFormal organizations approved and regulated by the SEC zMembers ycan only trade listed stocks ymust buy a seat on the exchange (member) zListing requirements (initial, continued): yminimum capitalization, shareholder equity, average closing share price, etc.

7. NYSE zCentralized continuous auction zExchange participants: ysingle specialist/stock (market maker) y(commission) brokers yindie floor brokers (spill over) yregistered traders z SuperDot z Major roles of NYSE- specialist yAuctioneer: buy/sell on own account at stated price yAgent / broker yDealer (own account) yCatalyst: focal point z Commissions: dereg’d

8. OTC Market (2 nd, 3 rd ) zTrading unlisted stocks zBut: listing requirements zNASDAQ stock market (virtual, 5k) zNASDAQ market tiers yNASDAQ National Market ySmall Cap Market: can graduate to NNM z NASDAQ market makers z Other OTC markets (80k) yOTC Bulletin Board yPink Sheets

9. Fourth Market zDirect trading of stocks between two customers (no intermediary) zCommissions avoided zAlternative trading systems (ATS) yelectronic communications networks (30% of NASDAQ volume; no brokers) ycrossing networks (aggregate orders across institutions by computer)

10. Trading Mechanisms zTypes of Orders ymarket order ylimit order xAutomatic thresholds zShort Selling yBorrow #stocks, not their price zMargin Transactions yBuy on margin: use shares as collateral yinitial margin ymaintenance margin z Transactions Costs y(time trade to minimise these) yexplicit costs xFees, taxes… yimplicit costs xImpact: changes p xTiming: if slow trade xOpportunity: if trade cancelled

11. Trading Arrangements for Institutional Investors zBlock Trading yTrades of 10,000 shares or more of a given stock or trades with a market value of $200,000 or more. yNYSE: 1961 3%; now > 50% yUpstairs market: broker may avoid exchange, OTC zProgram Trading ySimultaneous computer-assisted buy/sale shares in a large number of different stocks for: xRebalance portfolio (asset allocation) xIndex arbitrage (e.g. all S&P500 firms)

12. Stock Market Indicators zDow Jones Industrial Average (30 largest NYSE ‘blue chip’) zNYSE Composite (all NYSE) zNASDAQ Composite (all NASDAQ OTC) zS&P 500 (500 NYSE listed + OTC) zAMEX zValue Line Composite Average

13. Pricing Efficiency of the Stock Market zForms of Efficiency yWeak form: can’t predict from market history ySemistrong form: + `from public info’ yStrong form: + ‘from private info’ xbut: insider traders often earn abnormal returns zImplications for Investing in Common Stock yActive strategies: try to outperform market yPassive strategies: buy market at min. cost

14. Stock Market Indexes zJapan yTokyo Stock Price Index (TOPIX) yNikkei 225 Stock Average zUnited Kingdom yFinancial Times-Stock Exchange 100 (FTSE 100) z Germany yDeutscher Aktienindex (DAX) z France yCAC 40 z Others yHang Seng Index yMorgan Stanley EAFE Index