10e chapter 2: securities markets - ca sri lanka
TRANSCRIPT
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Investments: An Introduction
10e
Herbert B. Mayo
Chapter 2: Securities Markets
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Market Makers - Security Dealers - Specialists
• Offer to buy and sell for their own accounts
• Spread - difference between the bid and ask prices
• Market makers
– do not set the level of prices
– facilitate securities transactions
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Securities Markets
• Organized exchanges
–NYSE and the AMEX
–the listing of securities
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Securities Markets
• Over-the-counter markets
• Nasdaq stock market
• “Third” and “fourth” markets
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Buying and Selling Securities
• The role of brokers
– full service brokerage firms
– discount brokerage firms
• Electronic trading
• Difference between brokers and securities dealers
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Bulls and Bears
• The long (bullish) position
–anticipating prices rising
• The short (bearish) position
–anticipating prices falling
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Types of Orders
• Market orders
• Limit orders
• Stop orders
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Settlement
• Confirmation statements
• T + 3: Settlement date
• Delivery versus leaving securities
registered in street name
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Cash versus Margin Accounts
• Leveraging the position
• Increased potential percentage return
• Increased risk
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Margin Requirements
• Initial margin requirement
• Maintenance margin
• Margin call
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The Cost of Investing
• Commissions
• The spread
• Price concessions
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The Short Sale
• Premised on prices declining
• Sale of borrowed securities
• Shares must be repurchased and
returned to lender
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The Short Sale
• The flow of securities and cash: Establishing the position
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The Flow of Securities and Cash:
Closing the Position
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Short Interest Ratio
• Shares sold short relative to shares
outstanding
• Shares short relative to average daily
trading
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Short Interest Ratio
• Indication of future demand
or
• Measure of expected future price
change
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Foreign Securities
• Foreign stocks traded in American markets
• American Depository Receipts (ADRs)
– expressed in dollars and not the local currency
– registered with the SEC
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Regulation:
The Federal Securities Laws
• The federal security acts
– Securities Act of 1933
– Securities Exchange Act (1934)
– Public Holding Company Act of 1940
– Investment Advisors Act
– Sarbanes - Oxley
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The Securities and
Exchange Commission (SEC)
• Full disclosure of information
• Registration of securities
• Enforcement of the federal securities laws
• Suspension of trading
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Full Disclosure Documents
• 10-Q report
• 10-K report
• 13-Q report
• EDGAR
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Sarbanes-Oxley Act of 2002
• Creation of the public accounting
oversight board
• Requires independence of auditors
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Sarbanes-Oxley Act of 2002
• Certification of corporate financial
statements by CEOs and CFOs
• Criminal penalties
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Sarbanes-Oxley Act of 2002
• Firewalls between investment
banking operations and financial
analysts’ recommendations
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The Securities Investor
Protection Corporation
• Insures accounts against failure by
brokerage firms
• Similar to FDIC
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The Sale of New Securities:
The Private Placement
• Direct sale of securities
• Eliminates selling costs
• Features can be tailor-made for both
parties
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The Sale of New Securities
to the General Public
• Initial public offerings (IPOs)
• The role of investment bankers
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The Sale of New Securities
to the General Public
• The mechanics of underwriting
– the originating house or managing
underwriter
– the guaranteed sale - firm
commitment
– underwriter bears the risk
– the syndicate
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The Sale of New Securities
to the General Public
• The mechanics of security underwriting:
– underwriting discount
– prospectus
• Best effort agreements:
– issuing firm bears the risk.
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Pricing an IPO
• Underpricing leads to windfall gains to
initial buyers.
• Overpricing inflicts losses on initial
buyers and the investment bankers.
• Tendency to underprice to assure a
successful sale
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The Price Volatility of IPOs
• Prices can rise dramatically.
• Many firms eventually fail.
• Few investors get to participate in
IPOs.
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Regulation of Initial
Public Offerings
• Registration of new securities
• The prospectus
• Securities and Exchange Commission (SEC)
• The shelf-registration
• The lock-up
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Prospectus of an Issue of
Common Stock of Yahoo! Inc.