Chapter 18. The Common Stock Market

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Chapter 18. The Common Stock Market Types of markets
Trading mechanics Stock market indexes Pricing efficiency ,Common stock equity security
entitled to distributed earnings entitled to share of assets ,I. Type of Markets exchanges
OTC trading of unlisted stocks & listed stocks
direct trading ,Exchanges physical location for trading
trading by members own a seat on the exchange
stock traded on exchange are listed stocks ,NYSE the “Big Board”
about 2800 listed U.S. companies & 450 non-U.S. companies
trillion market value (2/04) 1366 seats (fixed) seat price million 2002
10/2003 .35 million ,stocks trade at post on the trading floor
20 posts, trading about 100 stocks
each stock has one specialist 10 specialist firms, 470 specialists
each specialist has 5-10 stocks process trades from floor brokers (5%) and electronically (95%) ,role of the specialist MUST maintain a fair and orderly market for stock
act as buyer or seller as needed (10% of trades) match buyers and sellers maintain order priority ,the future of the specialist may be phased on with next 5-10 years
recent SEC fines for improper trading for several major firms ,AMEX merged w/ Nasdaq 1998
specializes in equity derivative securities and closed-end funds ,Regional exchanges stocks may be listed on both NYSE and regional exchange
5 regional exchanges cheaper seat prices ,OTC markets electronic network of dealers all over the world
ECNs electronic communication networks
more than one dealer per stock not obligated to make a market
,Nasdaq not the only OTC system, but the largest
over 4000 companies listed mkt. value trillion (2/28/03)
leader in daily share volume over 500 dealers listing requirements ,II. Trading Mechanics types of orders
short selling buying on the margin institutional trading ,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 order (cont.)
market orders given priority in trading
no guarantee of execution price — price could rise/fall from time order is placed to time it is executed ,limit order
buy/sell order where investor specifies price range
“buy at or less” “sell at or more” specialist records orders in limit order book ,investor sets reservation price
BUT no guarantee that limit order will be executed ,stop order
order lies dormant
turns into market order when certain price (“the stop”) is reached “buy if price rises to ” “sell if price falls to ” — stop loss order ,investor does not have to watch market
but in a volatile market stop could be triggered prematurely
— end up trading unnecessarily ,stop limit order
turns into limit order when stop is reached
“buy if price rises to , but only is executed at or less” ,market if touched order
turns into market order if certain price is reached
“buy if price falls to ” “sell if price rises to ” ,how long is an order good? fill or kill order
executed when reaches trading floor, or canceled
good until canceled/open order is good indefinitely
,order size round lots
lots of 100 shares
odd lots less than 100 shares
more difficult to trade block trades 10,000 shares or 0,000 value
,short selling sale of borrowed stock
profit from belief that stock price is too high will fall soon how? borrow stock through broker
sell stock buy and return later ,short selling could further destabilize falling prices
tick test rules on exchange
short sales allowed if uptick or zero uptick in price for previous trades:
.75, (uptick) .75, .75 (zero upick) .75, (downtick) ,so short sellers
believe price will fall and SOON
but price not currently falling face unlimited losses if price rises ,Buying on the margin buyer borrows part of purchase price of stock, using stock as collateral
borrow at call money rate
Chapter 18. The Common Stock Market