SECURITIES MARKETS

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BUTE Department of Finance

• SECURITIES MARKETS

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History

• 1300, Brugge, Van den Burge family inn.
• 1611 Amsterdam, traded the stocks of Dutch-East
  Indian Company.
• Industrial revolution, iron companies, railway,
  bridge building - new form of capital raising.
• Chicago Board Of Trade 1848
• corn, rice, interest rate, DJIA, gold, silver
• Chicago Mercantile Exchange 1898
• butter, milk, cheese, timber, SP index, NASDAQ,
  Nikkei, currencies, oil, gas, economic indicators
  (GDP, unemployment rate, flat prices)
• New York Stock Exchange,
• 1792. 3 government bonds and 2 banks stocks
• 1896. Dow Jones Industrial Average
• 2005. 3200 stocks

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Security market Concentrated market, provide a
physical location or an electronic system that
allows potential buyers and sellers to interact

• Types of exchange by goods or services
• Commodity exchange, (oil, metal, fiber, corn,..)
• Security/Stock exchange (stocks, bonds,
  options,..)

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Common features

• Concentrated market
• Large quantity of supply and demand.The market
  does not necessarily own goods or services. Lower
  transaction costs.
• Special goods
• Only stock exchanges listed goods.
• Information centre
• Provide liquidity
• To buy or sell assets quickly. Price and
  quantity information publicly available.

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Security Exchange and OTC markets

OTC (over the counter) market Includes trading
in all stocks not listed on one of the
exchanges. OTC is not a formal organization. Any
security can be traded on the OTC market as long
as a registered dealer is willing to make a
market (willing to buy and sell shares,
currencies..) Third market Over the counter
trading of shares listed on an exchange. Fourth
market Direct trading of securities between two
parties with no broker intermediary.
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Types of exchange markets by the operation

• Pure auction market
• Price driven market. Stocks are sold to the
  investor with the highest bid price and bought
  form the seller with the lowest selling price.
• The orders are matched by a broker who does not
  own the stock, but who acts as a facilitating
  agent. Buyers and sellers submit bid and ask
  price for a given stock to a central location.
• Specialist (market maker) system
• Individual dealers provide liquidity by buying
  and selling the stocks.

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Contracts on the Stock Exchange

• Sell and buy
• Certain goods (listed)
• Certain place (floor)
• Certain time
• Certain way,
• Certain people
• Main types of contract
• Promt contract
• Termin contract (futures, forwards, options)

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Promt contract

• Selling/ buying and the settlement is at present
• Contract is effective. The buyer needs the
  goods, the seller wants to sell. They make
  business at present time and at present price.
• The settlement time is some days
• (2 day government bonds, 4 or 5 days stocks)

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Promt market with specialists (market maker)
B1
I1
T3
T2
T1
D1
D2
T4
T5
T6
B2
I2
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Contracts TIME specifications

• NOW
• Do it now, at a market price.
• DAY or days.
• Do it at a given day or days.
• Fill or kill.
• Fill the order instantly or cancelt it.
• Goog until canceled (GTC)

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Price specifications Market order

• Market order
• an order to buy or sell a stock at the best
  current price.
• Buy order to buy at lowest price available at
  the time the order reaches the floor. The lowest
  ask price.
• Selling order to sell at the highest bid price.
  
• Investor call the broker to buy GE stock at the
  current market.
• The quotation 75bid-76ask.
• The investors would buy at 76, at the lowest ask
  price

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Price specification LIMIT and STOP LOSS

• LIMIT order specifies the buy or sell price.
• GE current prices 75bid-76ask
• The investor expect that the stock price will
  decline to 71 in the near future.
• The order to purchase GE at 71.
• Stop loss order Special order whereby the
  investor directs the sale of a stock if it drops
  to a given price.
• Assume you buy a stock at 50 and expect that the
  price to go up. If you are wrong, you want to
  limit your loss. To protect yourself you could
  put in a stop-loss order at 45. In case if the
  stock dropped to 45, your stock would be sold.

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Exchange markets-types of contracts
Contracts
Promt
Derivatives
Options
Swaps
Termin
Derivative securities The payoff to the
investor depends directly on the value of another
security or commodity.
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Termin contracts

• Termin contracts makes a contract now, the buyer
  and seller settle now the price, the quantity,
  but the delivery of the goods will be at a
  future time.
• FUTURES Standardized term of the agreement (the
  expiration date, identity and amount of the
  underlying asset)
• FORWARD not standard contract ( termin on the
  OTC)
• Gives its holder both the right and full
  obligation to conduct the transaction at the
  predetermined future date (expiration date) and
  at a predetermined price (contract price).

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Hedge
Speculative
Arbitrage
Investors intension
Aim Gain from price change
Aim Decrease of risk
Aim Riskless gain
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Settle of the termin contract
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Housse-bess, Bull-bear

• Bull market (long position)
• Miller expects that the price goes up
• Bear market (short position)
• Farmer expects that the price goes down

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Forward contract - HEDGE
A Hungarian company made a contract with his
German partner in MAY. The Hungarian company
import goods with 120 000 euro. The German
company delivers in October, the Hungarian
partner transfer the euro in November. In MAY the
exchange rate 265HUF/ euro. Hungarian company
expects higher exchange in November, make a
forward contract, buy euro in the OTC market.
(F270 euro in May) Steps 1. H.company makes a
forward contract in May term 6 month, buy
120000 euro, contract price 270 euro. 2.  In
November H.company buy 120000 euro at  270. The
company transfer the euro to the German partner.
If the current price will be 275, the company
get some gain. If the current price will be less
than 270, the company lost some money.
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Future - speculative

• A Farmer wants to sell the wheat in July. He
  expects that the price will be lower, than now.
• A Miller want to buy wheat in July. He expects
  that the price will be higher than now.
• They make a contract now. Settle the price, the
  quantity, the quality, the delivery date..
• If the price goes up (above the contract price)
  until July, the farmer get a loss, he has to sell
  the wheat at the contract price.
• If the price goes down (under the contract
  price). The farmer get a gain, he sell the wheat
  at a contract price.

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Future current price goes up in July

• A FARMER is a speculator, he want gain from the
  price movement.
• The farmer has a futures contract for 10.July,
  contract price 1500.
• Current price 8. July 1400, a promt prices goes
  down.
• The farmer buy wheat at the promt market at the
  price 1400 and sell the contract at 1500 at the
  expiration. No physical settlement only financial
  settle.
• The miller has a loss.

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Forward payoff diagram
Contract payoff
Long forward MILLER
Short gain
Long gain
0
P1
P2
Long loss
Expiration date price of underlining security
F0,T
Short loss
Short forward FARMER
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