The Role of Securities Markets

1
Chapter 4

• The Role of Securities Markets

2
Security Markets

• Organized exchanges
• NYSE and the AMEX
• The listing of securities
• Over-the-counter markets (e.g., Nasdaq)

3
Market Makers - Security Dealers - Specialists

• Offer to buy and sell for their own accounts
• The spread - the difference between the bid and
  ask prices

4
Market Makers

• Do not set the level of prices
• Facilitate security transactions

5
Buying and Selling Securities

• The role of brokers
• full service brokerage firms
• discount brokers
• electronic trading
• The difference between
• a broker
• a security dealer

6
Security Transactions
The reporting of transactions
52 Wks High Low Stock Dividend Yield P/E Sales 100s High Low Close Net Chng
64 32 EMEC 0.88 1.9 20 18151 47 46 46.5 -0.50
7
Types of Orders

• Market orders
• Assured transaction
• Limit orders
• Specified price
• Transaction may not occur

8
Settlement

• Confirmation statements
• T 3 Settlement date
• Delivery versus holding securities in street name

9
The Cost of Investing

• Commissions
• Full service brokers
• Discount brokers
• On-line brokers
• The spread

10
Cash Versus Margin Accounts

• Leveraging the position
• Increased potential return
• Increased risk

11
Margin Requirements

• Initial margin requirement
• Margin call

12
Long and Short Positions

• The long (bullish) position
• Anticipating prices rising
• The short (bearish) position
• Anticipating prices falling

13
The Short Sale

• Sale of borrowed securities
• To close position
• Purchase the stock and return the borrowed
  securities

14
Measures of Security Prices

• Dow Jones Industrials
• SP 500 Stock Index
• New York Stock Exchange Index

15
Construction of Indices

• Questions concerning
• What securities to include
• How index is computed
• Can produce different measures of stock
  performance

16
Price Movements and Graphs

• How stock prices appear to have changed is
  affected by the presentation
• Impact of absolute and relative scales

17
Dow Jones Industrial Average
Absolute Scale
Relative Scale
18
Price Movements and GraphsAbsolute Scale
Dow Jones Industrial Average
19
Additional Aggregate Measures of the Stock Market

• Russell 1000
• Russell 2000
• Russell 3000
• SP 400 MidCap

• SP 600 SmallCap
• SP 1500
• Nasdaq Index
• Wilshire 5000 Index

20
Regulation - The Federal Security Laws

• Full disclosure laws Importance of information
• 10-K report
• The annual report
• Illegal use of inside information

21
The Securities and Exchange Commission (SEC)

• Enforces the federal security laws
• New issues
• Trading in securities
• Can suspend trading

22
The Securities Investor Protection Corporation

• Insures accounts against failure by brokerage
  firms
• Similar to FDIC
• Brokerage firms may carry additional insurance

23
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

24
Efficient Markets

• Easy entry and exit
• Information disseminated rapidly
• Price change occur quickly

25
Efficient Markets
26
Efficient Market Hypothesis

• Current price properly values a stock
• Cannot expect to consistently out perform

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Efficient Market Hypothesis

• Empirical results supports the hypothesis
• Exceptions anomalies to efficient market
  hypothesis