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Chapter 18 COMMON STOCK MARKETS IN THE UNITED STATES

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Chapter 18 COMMON STOCK MARKETS IN THE UNITED STATES

  1. 1. Chapter 18 COMMON STOCK MARKETS IN THE UNITED STATES
  2. 2. Characteristics of Common Stock Equity securities = ownership share of a corporation. Common (junior) stockholders are the residual owners: Right to income Right to assets Preferred (senior) stockholders have preference over common stockholders: Right to fixed dividend
  3. 3. Trading Locations Stock Exchanges trading floors auction system / open-outcry central auction specialist system Over-The-Counter Market no trading floor negotiated system multiple market maker system Independent Electronic Trading Systems
  4. 4. (US) Stock Exchanges Major National Stock OTC Market Exchanges NASDAQ NYSE or Big Board NASD AMEX or ASE or Curb Stocks can be dual- Regional Stock listed Exchanges Boston, Chicago, Cincinnati, San Francisco, Philadelphia
  5. 5. Types of Markets First Market trading on exchanges of stocks listed on an exchange Second Market trade in OTC market of stocks not listed on exchange Third Market trading in OTC market of stocks listed on an exchange (deregulation helped: needn’t be member) Fourth Market private transactions between institutional investors e.g. B.S.E.
  6. 6. Exchanges (1st mkt) Formal organizations approved and regulated by the SEC Members can only trade listed stocks must buy a seat on the exchange (member) Listing requirements (initial, continued): minimum capitalization, shareholder equity, average closing share price, etc.
  7. 7. NYSE Centralized SuperDot continuous auction Major roles of NYSE- Exchange specialist participants: Auctioneer: buy/sell on own account at single specialist/stock stated price (market maker) Agent / broker (commission) brokers Dealer (own account) indie floor brokers Catalyst: focal point (spill over) Commissions: dereg’d registered traders
  8. 8. OTC Market (2nd, 3rd) Trading unlisted NASDAQ market stocks makers But: listing Other OTC markets requirements (80k) NASDAQ stock OTC Bulletin Board market (virtual, 5k) Pink Sheets NASDAQ market tiers NASDAQ National Market Small Cap Market: can graduate to NNM
  9. 9. Fourth Market Direct trading of stocks between two customers (no intermediary) Commissions avoided Alternative trading systems (ATS) electronic communications networks (30% of NASDAQ volume; no brokers) crossing networks (aggregate orders across institutions by computer)
  10. 10. Trading Mechanisms  Types of Orders  Transactions Costs market order (time trade to minimise limit order these) Automatic thresholds explicit costs  Short Selling Fees, taxes… implicit costs Borrow #stocks, not their price Impact: changes p Timing: if slow trade  Margin Transactions Opportunity: if trade Buy on margin: use shares cancelled as collateral initial margin maintenance margin
  11. 11. Trading Arrangements for Institutional Investors Block Trading Trades of 10,000 shares or more of a given stock or trades with a market value of $200,000 or more. NYSE: 1961 3%; now > 50% Upstairs market: broker may avoid exchange, OTC Program Trading Simultaneous computer-assisted buy/sale shares in a large number of different stocks for: Rebalance portfolio (asset allocation) Index arbitrage (e.g. all S&P500 firms)
  12. 12. Stock Market Indicators Dow Jones Industrial Average (30 largest NYSE ‘blue chip’) NYSE Composite (all NYSE) NASDAQ Composite (all NASDAQ OTC) S&P 500 (500 NYSE listed + OTC) AMEX Value Line Composite Average
  13. 13. Pricing Efficiency of the Stock Market Forms of Efficiency Weak form: can’t predict from market history Semistrong form: + `from public info’ Strong form: + ‘from private info’ but: insider traders often earn abnormal returns Implications for Investing in Common Stock Active strategies: try to outperform market Passive strategies: buy market at min. cost
  14. 14. Stock Market Indexes Japan Germany Tokyo Stock Price Deutscher Aktienindex Index (TOPIX) (DAX) Nikkei 225 Stock France Average CAC 40 United Kingdom Others Financial Times-Stock Hang Seng Index Exchange 100 (FTSE 100) Morgan Stanley EAFE Index

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