1. Securities Markets Reference: Chapter 3 BKM

2. How Firms Issue Securities  Primary Market: Market for new issues of securities  Secondary Market: Market for already existing securities  There are two types of primary market issues;  IPO  Seasoned  Underwriting: Public offerings of both stocks and bonds typically are marketed by investment bankers who in this role are called underwriters  Firm Commitment vs. Best Efforts  Prospectus: A description of the firm and the security it is issuing

3. How Firms Issue Securities (continued)  Underwriting Syndicate  Shelf Registration: Register securities and gradually sell them to the public for two years following the initial registration

4. How Securities are Traded; Types of Markets  Direct Search Markets:  Least organized  Direct seeking by buyers and sellers  Commodity is low-priced, non-standard  Brokered Markets:  Active trading  Brokers have specialized knowledge  “Block Houses”

5.  Dealer Markets: Markets in which traders specializing in particular assets buy and sell for their own accounts  Dealer’s spread b/w bid and ask prices  OTC is an example  Auction Markets: A market where all traders meet at one place to buy or sell an asset  Continuous vs. Periodic How Securities are Traded; Types of Markets (continued)

6. Types of Brokers  Full service brokers are firms offering information (on different securities) and advice (for selling and/or buying) apart from usual services.  Discount brokers are firms offering less (or no) research services and will charge less.  Online brokers offer much similar services as full service brokers but trade interfaces are available to clients for online trading.

7.  Dealing or execution only, i.e., your broker deals for you and executes your instructions.  Advisory means the broker will offer you advice on buying, selling, or holding a specific scrip.  Discretionary; Broker takes all the buying and selling decisions, informs you regularly regarding your portfolio. Types of Brokers (at KSE)

8.  Cash account authorizes a customer for cash transactions only.  Margin account authorizes a customer to transact for a value greater than the available cash, i.e., use a loan.  Asset management account are unique, i.e., offering services such as investment of cash balances in funds and check writing facilities etc.  Wrap accounts are special types of accounts accumulating all costs in one fee. Types of Brokerage Accounts

9.  Bid price is the price at which a dealer or other trader is willing to purchase a security  Ask price is the price at which a dealer or other trader will sell a security  Bid-Ask spread is the difference between a dealer’s bid and asked price How Securities are Traded; Types of Orders

10.  Commission charged by the broker depends upon;  Price of a security;  Market in which the security is traded, etc.  CVT @ 0.02% of purchase price.  WHT @ 0.005% of sale value (replaced with FED). Costs Associated with Trading

11.  An order may be classified on the basis of;  Type of transaction (e.g., buy or sell)  Price (e.g., market or limit)  Duration/Time (e.g., day or good till cancelled)  Orders may be placed through phone, in written, or online. Placing Orders for Trading

12.  Bid (buy) order is placed if an investor wants to buy securities.  Offer (sell) order is placed if an investor wants to sell securities.  Short sale is the sale of borrowed stocks with the hope of returning them at lower prices.  Buy to cover is the sale executed to close out a short position.

13.  Both bid & offer orders are;  Market or at Best orders, or  Limit orders, and/or  Stop orders  Limit order specifies a limit for the purchase (in bid order) or sale (in offer order) price.  An order is a market order if no price (purchase or sale) is specified by investor and is executed at available best market price.  An order to buy or sell a security when its price crosses the specified level is called stop order. Placing Orders for Trading

14.  Orders may have Time in Force Restriction, i.e.,  Day (market orders are always day orders)  Good Till Cancelled (GTC) (i.e. Open)  Good to Date (Month-Day-Year) (GTD)  Good for Week (GTW)  Good for Month (GTM)  Fill or Kill (FOK) (placed outside market hours, and executed in the immediate next trading session)

15.  Limit orders are ranked on the basis of price first, i.e., highest price in buy orders and lowest price in sell orders are settled first, and then on first come & first serve basis, i.e., two orders with same price will be ranked on which order reached the exchange floor first.  Limit orders will be executed only if the specified prices are available.  Unsettled limit orders are queued for future execution (up to 90 days) and do not lose priority.  Volume of the limit orders may not match for settlement. Sorting Orders

16.  Market orders are settled with the top limit order.  If partially completed the market order is fulfilled from the next available limit order in the queue.  Must be executed immediately. Sorting Orders

17.  Stop orders are of two main types;  Stop Buy Order  Stop Loss Order  Stop buy order specifies a price which if breached triggers buying.  Used by momentum traders who wish to take advantage when the stock price has moved upwards past a threshold level indicating upward momentum that is expected to continue. Sorting Orders

18.  Stop loss order is an order to sell stock if the price lowers than the specified price.  Useful when investor wants to limit losses, especially during short selling. Sorting Orders

19.  Following terminologies are often encountered in trading;  Tick Size; the minimum amount that a price of stock may change by. It is one paisa at KSE.  Circuit Breakers/Locks; Level at which trades are stopped in a particular scrip. At KSE trading is restricted in upper & lower limits of 5% or Re. 1/-, whichever is higher/lower, from last closing price.  Market Lot; Minimum tradable quantity of shares. Sorting Orders

20. Execution of Orders on Trade Screen  A partial trade screen looks like;  Hypothesize a company with a ticker/symbol XYZ. SymbolBid VolumeBid PriceAsk VolumeAsk Price SymbolBid VolumeBid PriceAsk VolumeAsk Price XYZ

21. Execution of Orders on Trade Screen  Investor A wants to buy 1000 shares of XYZ @ Rs. 10.00 (a limit order);  Investor B wants to sell 500 shares of XYZ @ Rs. 10.80 (a limit order) S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ100010.00 S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ100010.0050010.80

22. Execution of Orders on Trade Screen  A bid (buy) market order for 250 shares of XYZ reaches;  A sell (ask) market order for 500 shares reaches; S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ100010.0025010.80 S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ50010.0025010.80

23. Execution of Orders on Trade Screen  A bid limit order reaches of 500 shares @ Rs. 10.01 per share;  A sell (ask) limit order for 500 shares @ Rs. 10.75 per share reaches S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ50010.0125010.80 2XYZ50010.00 S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ50010.0150010.75 2XYZ50010.0025010.80

24. Execution of Orders on Trade Screen  Following orders reach the exchange;  Bid limit order of 500 shares @ Rs. 10.50, and  Ask limit order of 250 shares @ Rs. 10.50 Prices are matching but quantities are not. 250 shares @ Rs. 10.50 will be transferred to the bid trader. S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ50010.5025010.50 2XYZ50010.0150010.75 3XYZ50010.0025010.80