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Chapter 3

How Securities Are Traded ()

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Primary vs. Secondary Security Sales

Primary()
New issue Key factor: issuer receives the proceeds from the sale. IPOSeasoned new issues() Public offering() vs. Private placement( ).

Secondary(;)
- Existing owner sells to another party. - Issuing firm doesnt receive proceeds and is not directly involved. - NYSE, OTC, ,

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Investment Banking Arrangements

Underwritten vs. Best Efforts - Underwritten: firm commitment on proceeds to the issuing firm.() - : (),() , (). - ? - Best Efforts: no firm commitment.(,) -

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(): OK! (): NO!

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Investment Banking Arrangements

Negotiated vs. Competitive Bid - Negotiated: issuing firm negotiates terms with investment banker.( , , ) - Competitive bid: issuer structures the offering and secures bids. - () - (2003/8, )

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Public Offerings

Public offerings: registered with the SEC and sale is made to the investing public.
- Shelf registration (Rule 415, since 1982)

Initial Public Offerings (IPOs)

- Evidence of underpricing - Performance

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Private Placements()

Private placement: sale to a limited number of sophisticated investors not requiring the protection of registration. Dominated by institutions. Very active market for debt securities. Not active for stock offerings.

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1. (Direct search markets) 2. (Brokered markets)3. (Dealer markets)4. (Auction markets)

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Organization of Secondary Markets () Organized exchanges OTC market Third market Fourth market

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Organized Exchanges ()

Auction markets with centralized order flow(). Dealership function: can be competitive or assigned by the exchange (Specialists). Securities: stock, futures contracts, options, and to a lesser extent, bonds. Examples: NYSE, AMEX, Regionals, CBOE.

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OTC Market

Dealer market without centralized order flow. NASDAQ: largest organized stock market for OTC trading; information system for individuals, brokers and dealers. Securities: stocks, bonds and some derivatives.
- Most secondary bonds transactions

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Third Market

Trading of listed securities away from the exchange. Institutional market: to facilitate trades of larger blocks of securities. Involves services of dealers and brokers

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Fourth Market

Institutions trading directly with institutions No middleman involved in the transaction Organized information and trading systems ECN(Electronic communication network) Development

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International Market Structures

London Stock Exchange
- Dealer market similar to NASDAQ - Stock Exchange Automated Quotation

Tokyo Stock Exchange

- No market making service - Sartori provides bookkeeping service - Feature a floor and electronic trading

Global Market Alliances

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OTC

OTC OTC Auction ,. () : 2003/9/29,(), .

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Costs of Trading

Commission: fee paid to broker for making the transaction Spread: cost of trading with dealer
- Bid: price dealer will buy from you - Ask: price dealer will sell to you - Spread: ask - bid

Combination: on some trades both are paid

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: : 0.1425%.0.3% . *0.1%. *,.( 5000,6 ,500015,1.)

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10,70 ,,72, ? ?( .)

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Answer

: 70*(1+0.1425%)*10*1000=70.1*10000 =701000. : 72*(1-0.1425%-0.3%)*10*1000= 71.6814*10000=716814. :716814-701000=15814, : 15814/701000=2.256% : 72/70-1=2.86% : 0.1425%+0.1425%+0.3%=0.585%

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1/(0.585%)=170! ? ? ?

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Types of Orders

Instructions to the brokers on how to complete the order Market(): ()()7%; ,! :;OTC:. Limit() Stop loss() *, .

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10:0.01 : : 4.85 4.86 1050:0.05 : : 42.15 42.20 50100:0.1 : : 60.9 61.0 100500:0.5 : : 150.0 150.5 5001000:1 : : 602 603 1000:5

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Margin Trading()

Using only a portion of the proceeds for an investment. Borrow remaining component. Margin arrangements differ for stocks and futures.

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Stock Margin Trading

Maximum margin - Currently 50% - Set by the Fed Maintenance margin() - Minimum level the equity margin can be Margin call() - Call for more equity funds

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Margin Trading - Initial Conditions

X Corp 50% 40% 1000 Initial Position Stock $70,000 Borrowed Equity $35,000 $35,000 $70 Initial Margin Maintenance Margin Shares Purchased

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Margin Trading - Maintenance Margin

Stock price falls to $60 per share New Position Stock $60,000 Borrowed $35,000 Equity 25,000 Margin% = $25,000/$60,000 = 41.67%

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Margin Trading - Margin Call

How far can the stock price fall before a margin call? (1000P - $35,000)* / 1000P = 40% ( )/= P = $58.33 * 1000P - Amount Borrowed = Equity

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Short Sales()

Purpose: to profit from a decline in the price of a stock or security. Mechanics Borrow stock through a dealer. Sell it and deposit proceeds and margin in an account. Closing out the position: buy the stock and return to the party from which it was borrowed.

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Short Sale - Initial Conditions

Z Corp 50% 30% $100

100 Shares Initial Margin Maintenance Margin Initial Price

Sale Proceeds $10,000 Margin & Equity 5,000 Stock Owed 10,000

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Short Sale - Maintenance Margin

Stock Price Rises to $110 Sale Proceeds Initial Margin Stock Owed Net Equity Margin % (4000/11000) $10,000 5,000 11,000 4,000 36%

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Short Sale - Margin Call

How much can the stock price rise before a margin call? ($15,000* - 100P) / (100P) = 30% ($5000 (100P 10000) ) / (100P) = 30% ( )/= P = $115.38 * Initial margin plus sale proceeds

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: ( )/= : ( )/=

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():
+ (+)

= ----------------------------------------------------- + * 120%

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Regulation of Securities Markets

Government Regulation Self-Regulation Circuit Breakers() Insider Trading ()