Chapter 12 – Securities Markets Where financial assets are traded


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  • Underwriter – purchases entire issue hoping to sell it at a higher price In addition to underwriting, investment banks provide other services including securities distribution and advice (capital structure, M&A, etc) Use of syndicates
  • SEC is the primary US securities regulator A listing is the Exchange's approval to trade a security on the exchange; must meet minimum requirements All publicly traded securities must be registered with the SEC Prospectuses are often over 100 pages Actually the prospectus is a condensed version of the entire registration document
  • Formed in 1792. All markets based on some form of “order book” – list of buy and sell orders and their prices NYSE handles 80% of the trades in the listed stock which may now trade anywhere
  • Again, SEC does not prohibit sale of risky securities 1933 Act requires registration of new issues Investors must be provided sufficient financial information to make an informed decision. Martha Stewart’s problems with trading on “inside information” arise under the 1934 Act.
  • You are only responsible for being able to describe a market order.
  • Penalties range from suspension, fines to restitution but most settlements include a statement “this was settled without the firm admitting or denying” any wrong doing. Names are often published in the newspaper. Fee have been increasing recently but Scottrade -$7, E-trade - $15, Schwab $30
  • Also called brokers, account executives and financial consultants. Also provide investment advice and information. In most cases, trades executed when instructed by customer. In some cases brokers given discretionary powers to execute trades based on their judgment. This can be dangerous. System criticism: arbitration is binding; cards stacked in favor of the broker. Brokers licensed by SEC and also regulated by NASD.
  • Formed in 1970 Stress replacement of lost securities FDIC protects against loss of value on deposits; SIPC protects against theft or failure of firm holding your securities.
  • Some brokers have set fees, others are negotiable; often based on size of account. Tremendous amount of web information If you don’t need advice, go to discount broker and trade online Commissions on phone orders are double online orders Some firms base commission on size of account and accounts that don’t trade frequently. By combining accounts from different brokers may make one account large enough to avoid fees.
  • Value Line –sample page in book. Very widely used. EDGAR – all filings made by company with SEC. Great source of information about companies.
  • Too much detail in this chapter. Responsible for the above. Skip: specialists (unless writing term paper on stock markets) types of orders (except market orders), shorting and margin accounts.
  • Chapter 12 – Securities Markets Where financial assets are traded

    1. 1. Chapter 12 – Securities Markets <ul><li>Where financial assets are traded </li></ul><ul><li>Primary market – First time a security sold </li></ul><ul><ul><li>Initial Public Offering (IPO's) </li></ul></ul><ul><li>Secondary market – existing securities </li></ul><ul><li>Investment bankers – financial advice to companies </li></ul><ul><ul><li>Underwrite – purchase entire new issue </li></ul></ul><ul><ul><li>Merrill Lynch, Goldman Sachs, Citibank </li></ul></ul>
    2. 2. Terminology to Understand <ul><li>Securities and Exchange Commission </li></ul><ul><li>Registration (prospectus) required by SEC </li></ul><ul><ul><li>Fair, truthful, accurate info about new issues </li></ul></ul><ul><ul><li>Does not prohibit sale of risky assets </li></ul></ul><ul><li>Organized exchanges such as NYSE </li></ul><ul><ul><li>Has physical location; trades listed securities; generally of larger companies </li></ul></ul><ul><ul><li>Nine exchanges in the US </li></ul></ul>
    3. 3. Stock Markets NYSE, NASDAQ, ECN’s <ul><li>New York Stock Exchange </li></ul><ul><ul><li>2,800 listed stocks </li></ul></ul><ul><ul><li>Most liquid market </li></ul></ul><ul><ul><li>Humans (specialists) match bids and offers </li></ul></ul><ul><ul><li>Physical floor on Wall Street </li></ul></ul><ul><ul><li>Owned by 1,366 seat holders </li></ul></ul>
    4. 4. NASDAQ or Over-the-Counter <ul><li>National Association of Securities Dealers Automated Quotation System </li></ul><ul><ul><li>Trades 3,400 stocks </li></ul></ul><ul><ul><li>No formal listings </li></ul></ul><ul><ul><li>But traded companies must register with SEC </li></ul></ul><ul><ul><li>Traders at hundreds of locations </li></ul></ul><ul><ul><li>Loose federation of electronic traders </li></ul></ul>
    5. 5. Electronic Communications Networks (ECN’s) <ul><li>Trade exchange-listed and NASDAQ stocks </li></ul><ul><li>Collect and post bids and offers </li></ul><ul><li>Match orders electronically </li></ul><ul><li>Execution is immediate </li></ul><ul><li>Have 7% of the trading volume in NYSE stocks and 83% of OTC stocks </li></ul><ul><li>Biggest: Instanet, Island and ArcaEx </li></ul>
    6. 6. Regulation <ul><li>SEC plus self-regulation </li></ul><ul><li>Securities Act of 1933 associated with new securities </li></ul><ul><li>Securities Exchange Act – 1934 regulates secondary market and financial reporting </li></ul><ul><li>Investment Advisors Act of 1940 – covers all types of advisors and mutual funds </li></ul>
    7. 7. Stock Trading <ul><li>Exchange assigns stock to a &quot;specialist&quot; who buys and sells the issue to &quot;maintain a fair and orderly market&quot;. </li></ul><ul><li>Orders can take various forms </li></ul><ul><li>Short selling – borrow a stock, sell it in expectation of buying back at lower price </li></ul><ul><li>Market order – immediate at best possible price </li></ul>
    8. 8. Brokers <ul><li>Licensed by SEC </li></ul><ul><ul><li>Can sanction rule-breakers; names in newspapers </li></ul></ul><ul><li>Types – full service versus discount brokers </li></ul><ul><ul><li>500 shares @ $20 = $10,000 investment </li></ul></ul><ul><ul><li>Commissions: FS = $253; Discount $7 to 30 </li></ul></ul><ul><li>Registration – you can hold paper certificates or broker can hold electronically </li></ul>
    9. 9. Stock Brokers <ul><li>A person who buys and sells stock on behalf of clients. </li></ul><ul><li>Operates as an agent </li></ul><ul><ul><li>Doesn’t own the securities but matches buy and sell orders </li></ul></ul><ul><li>Securities Investor Protection Corp (SPIC) insures customer accounts against financial failure of brokers </li></ul>
    10. 10. SIPC <ul><li>Securities Investor Protection Corp. </li></ul><ul><li>Federal agency but not like FIDC </li></ul><ul><li>Does not protect against loss of value </li></ul><ul><li>Replaces securities stolen by a broker or loss through failure of brokerage holding your securities </li></ul><ul><ul><li>Up to $500,000; 99% recovery rate </li></ul></ul>
    11. 11. Brokerage Fees <ul><li>Have been increasing </li></ul><ul><li>What can you do to hold down? </li></ul><ul><ul><li>Do you even need a broker? </li></ul></ul><ul><ul><li>Trade online </li></ul></ul><ul><ul><li>Watch asset level- big balances help a lot </li></ul></ul><ul><ul><li>Consolidate household accounts </li></ul></ul><ul><ul><li>Opt for e-mail confirms </li></ul></ul>
    12. 12. Sources of Information <ul><li>Annual reports to shareholders </li></ul><ul><li>(Full service) broker reports </li></ul><ul><li>Rating agencies </li></ul><ul><li>Press – WSJ, Barons, Fortune Value Line </li></ul><ul><li>SEC's online EDGAR </li></ul><ul><li>Watch out for &quot;free advice&quot; </li></ul>
    13. 13. Registration <ul><li>Book entry – completely electronic </li></ul><ul><ul><li>No paper certificates </li></ul></ul><ul><ul><li>More convenient, less costly </li></ul></ul><ul><li>Joint tenancy with Right of Survivorship </li></ul><ul><ul><li>Surviving owner receives full ownership </li></ul></ul><ul><li>Tenancy-in-Common - goes to heirs </li></ul>
    14. 14. Key Topics <ul><li>IPO </li></ul><ul><li>Investment banker </li></ul><ul><li>Exchanges vs OTC </li></ul><ul><li>International Market </li></ul><ul><li>Intent of regulation </li></ul><ul><li>Market orders only </li></ul><ul><li>Sources of info </li></ul>