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Market Makers - Security Dealers - Specialists Offer to buy and sell for their own accounts The spread - the difference between the bid and ask prices
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Chapter 4
The Role of Securities Markets
Security Markets
• Organized exchanges–NYSE and the AMEX–The listing of securities
• Over-the-counter markets (e.g., Nasdaq)
Market Makers - Security Dealers - Specialists
• Offer to buy and sell for their own accounts
• The spread - the difference between the bid and ask prices
Market Makers
–Do not set the level of prices
–Facilitate security transactions
Buying and Selling Securities
• The role of brokers–full service brokerage firms–discount brokers–electronic trading
• The difference between–a broker –a security dealer
Security Transactions
52 WksHigh
Low Stock Dividend
Yield P/E Sales 100s
High Low Close Net Chng
64 32 EMEC 0.88 1.9 20 18151 47 46 46.5 -0.50
The reporting of transactions
Types of Orders
• Market orders–Assured transaction
• Limit orders–Specified price–Transaction may not occur
Settlement
• Confirmation statements
• T + 3: Settlement date
• Delivery versus holding securities in street name
The Cost of Investing
• Commissions–Full service brokers–Discount brokers–On-line brokers
• The spread
Cash Versus Margin Accounts
• Leveraging the position
• Increased potential return
• Increased risk
Margin Requirements
• Initial margin requirement
• Margin call
Long and Short Positions
• The long (bullish) position–Anticipating prices rising
• The short (bearish) position–Anticipating prices falling
The Short Sale
• Sale of borrowed securities
• To close position:–Purchase the stock and return
the borrowed securities
Measures of Security Prices
• Dow Jones Industrials
• S&P 500 Stock Index
• New York Stock Exchange Index
Construction of Indices
• Questions concerning:–What securities to include–How index is computed
• Can produce different measures of stock performance
Price Movements and Graphs
• How stock prices appear to have changed is affected by the presentation
• Impact of absolute and relative scales
Dow Jones Industrial AverageAbsolute Scale Relative Scale
Price Movements and GraphsAbsolute Scale
Dow Jones Industrial Average
Additional Aggregate Measures of the Stock Market
• Russell 1000• Russell 2000• Russell 3000• S&P 400
MidCap
• S&P 600 SmallCap
• S&P 1500• Nasdaq Index• Wilshire 5000
Index
Regulation - The Federal Security Laws
• Full disclosure laws: Importance of information
–10-K report
–The annual report
• Illegal use of inside information
The Securities and Exchange Commission (SEC)
• Enforces the federal security laws–New issues–Trading in securities
• Can suspend trading
The Securities Investor Protection Corporation
• Insures accounts against failure by brokerage firms
• Similar to FDIC
• Brokerage firms may carry additional insurance
Foreign Securities
• Foreign stocks traded in American markets
• American Depository Receipts (ADRs)–Avoids the problem of language–Expressed in dollars and not the
local currency–Registered with the SEC
Efficient Markets
• Easy entry and exit
• Information disseminated rapidly
• Price change occur quickly
Efficient Markets
Efficient Market Hypothesis
• Current price properly values a stock
• Cannot expect to consistently out perform
Efficient Market Hypothesis
• Empirical results supports the hypothesis
• Exceptions “anomalies” to efficient market hypothesis