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transcript
Copyright 2014 Diane Scott Docking 1
The Stock Market-Secondary Market
Copyright 2014 by Diane Scott Docking 2
Learning Objectives
Describe the major secondary markets. Examine the process by which a trade takes place in the
secondary stock market. Understand the role of brokers, dealers, specialists, and
market makers Understand a stock quote. Recognize the major stock market indices Understand the difference between a long position and a short
position in the stock market
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Copyright 2014 by Diane Scott Docking
Secondary Stock Markets
Secondary stock markets the markets in which stocks, once issued, are traded
among investors The U.S. has two major stock market exchanges
New York Stock Exchange Euronext (NYSE Euronext) the American Stock Exchange (AMEX) was purchased
by NYSE Euronext on October 1, 2008 National Association of Securities Dealers
Automated Quotation (NASDAQ)
Secondary stock markets the markets in which stocks, once issued, are traded
among investors The U.S. has two major stock market exchanges
New York Stock Exchange Euronext (NYSE Euronext) the American Stock Exchange (AMEX) was purchased
by NYSE Euronext on October 1, 2008 National Association of Securities Dealers
Automated Quotation (NASDAQ)
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Copyright 2014 by Diane Scott Docking
NYSE Euronext (aka: Big Board)
Created by the merger of NYSE Group, Inc. and Euronext N.V. on April 4, 2007 to become the first truly global stock market
As of April 2014, over 2,800 different stocks trade on NYSE Euronext, with a market capitalization of over $18 trillion.
Trading occurs at a specific place on the floor of the exchange called a trading post
Each stock has a special market maker called a specialist that maintains liquidity for the stock at all times http://www.nyse.com
Created by the merger of NYSE Group, Inc. and Euronext N.V. on April 4, 2007 to become the first truly global stock market
As of April 2014, over 2,800 different stocks trade on NYSE Euronext, with a market capitalization of over $18 trillion.
Trading occurs at a specific place on the floor of the exchange called a trading post
Each stock has a special market maker called a specialist that maintains liquidity for the stock at all times http://www.nyse.com
5 Copyright 2014 Diane Scott Docking
NASDAQ and OTC Markets
NASDAQ is the world’s first electronic market and has no physical trading floor
Provides continuous trading for the most active stocks traded over the counter (OTC)
Primarily a dealer market in which often more than 20 dealers act as market makers
A small order execution system (SOES) provides automatic order execution for orders of less than or equal to 1,000 shares
The NASD maintains an electronic “OTC bulletin board” and “pink sheets” for small firms that are not part of the NASDAQ
http://www.nasdaq.com
NASDAQ is the world’s first electronic market and has no physical trading floor
Provides continuous trading for the most active stocks traded over the counter (OTC)
Primarily a dealer market in which often more than 20 dealers act as market makers
A small order execution system (SOES) provides automatic order execution for orders of less than or equal to 1,000 shares
The NASD maintains an electronic “OTC bulletin board” and “pink sheets” for small firms that are not part of the NASDAQ
http://www.nasdaq.com
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Copyright 2014 by Diane Scott Docking
NYSE Euronext Characteristics
Extensive listing requirements E.g..: firm market value and trading volume NASDAQ requirements are less demanding
Annual Fees for listing* NYSE range from $42,000 - $500,000 (function of shares outstanding) NASDAQ range from $32,000 - $99,500 (function of shares outstanding
and global or non-global market)
Extensive listing requirements E.g..: firm market value and trading volume NASDAQ requirements are less demanding
Annual Fees for listing* NYSE range from $42,000 - $500,000 (function of shares outstanding) NASDAQ range from $32,000 - $99,500 (function of shares outstanding
and global or non-global market)
Listing Requirements* NYSE NASDAQ
Round-lot (100 shares) shareholders 400 450
Number of public shares (millions) 1.1 1.25
Market value of public shares ($ millions) $100 $45
Pre-tax income ($ millions) $2.00 $1.00
*As of 4/22/14
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Copyright 2014 by Diane Scott Docking
NYSE Euronext Characteristics (cont.)
Extensive member requirements (Rule 300 and 301) Current fee http://www.nyse.com/pdfs/Trading_License_Client_Notice_053111.pdf
Qualifications http://www.nyse.com/equities/nyseequities/1167954368134.html
Legal age Provide personal business history Medical examination Recommendation letters Fingerprinting & background check Appearance before board Must pass Exchange trading qualifying exam Brokerage licenses Continuing education Training sessions
Extensive member requirements (Rule 300 and 301) Current fee http://www.nyse.com/pdfs/Trading_License_Client_Notice_053111.pdf
Qualifications http://www.nyse.com/equities/nyseequities/1167954368134.html
Legal age Provide personal business history Medical examination Recommendation letters Fingerprinting & background check Appearance before board Must pass Exchange trading qualifying exam Brokerage licenses Continuing education Training sessions
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Copyright 2014 by Diane Scott Docking
NYSE Euronext Characteristics (cont.)
Electronic communication networks (ECNs) normal trading occurs between 9:30 a.m. and 4:00 p.m. eastern
standard time extended-hours trading occurs through computerized
alternative trading systems (ATSs) a.k.a. ECNs Online trading via the internet is available
Electronic communication networks (ECNs) normal trading occurs between 9:30 a.m. and 4:00 p.m. eastern
standard time extended-hours trading occurs through computerized
alternative trading systems (ATSs) a.k.a. ECNs Online trading via the internet is available
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Copyright 2014 by Diane Scott Docking
NYSE Euronext Characteristics (cont.)
Program trading the simultaneous buying and selling of a portfolio of at least 15
different stocks valued at more than $1 million using computer programs to initiate the trades
Circuit breakers Rule 80B Temporarily halts trading to give investors time to make
informed choices during periods of high market volatility
Program trading the simultaneous buying and selling of a portfolio of at least 15
different stocks valued at more than $1 million using computer programs to initiate the trades
Circuit breakers Rule 80B Temporarily halts trading to give investors time to make
informed choices during periods of high market volatility
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Copyright 2014 by Diane Scott Docking
NYSE Euronext Characteristics (cont.)
Circuit breakers Rule 80B
(a) The Exchange shall halt trading in all stocks and shall not reopen for the time periods specified in this Rule if there is a Level 1, 2, or 3 Market Decline.
(i) For purposes of this Rule, a Market Decline means a decline in price of the S&P 500® Index between 9:30 a.m. and 4:00 p.m. on a trading day as compared to the closing price of the S&P 500® Index for the immediately preceding trading day. The Level 1, Level 2, and Level 3 Market Declines that will be applicable for the trading day will be publicly disseminated before 9:30 a.m.
(ii) A "Level 1 Market Decline" means a Market Decline of 7%.
(iii) A "Level 2 Market Decline" means a Market Decline of 13%.
(iv) A "Level 3 Market Decline" means a Market Decline of 20%.
Circuit breakers Rule 80B
(a) The Exchange shall halt trading in all stocks and shall not reopen for the time periods specified in this Rule if there is a Level 1, 2, or 3 Market Decline.
(i) For purposes of this Rule, a Market Decline means a decline in price of the S&P 500® Index between 9:30 a.m. and 4:00 p.m. on a trading day as compared to the closing price of the S&P 500® Index for the immediately preceding trading day. The Level 1, Level 2, and Level 3 Market Declines that will be applicable for the trading day will be publicly disseminated before 9:30 a.m.
(ii) A "Level 1 Market Decline" means a Market Decline of 7%.
(iii) A "Level 2 Market Decline" means a Market Decline of 13%.
(iv) A "Level 3 Market Decline" means a Market Decline of 20%.
Copyright 2014 Diane Scott Docking 11
How Trades Are ExecutedFloor ______
_____________
Market-______
_______
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How Trades Are Executed
Acts on behalf of an investor who wishes to execute orders. May work for a brokerage house as their agent May work for self (dealer) Broker functions:
Receives, transmits and executes orders on the trading floor Brings together buyers and sellers Negotiates prices Completes the physical trade with other floor participants
In return, the broker receives a commission.
Floor Broker
Copyright 2014 Diane Scott Docking 13
How Trades Are Executed
Buys and sells stocks as a principal (for self). Individual, or Firm
Firm will have brokers acting as their agents.
Will hold inventory
Dealer
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How Trades Are Executed
Specialists serve as brokers/dealers, matching buy/sell orders in a few, specific stocks on the exchange
Serve to maintain fair and orderly market i.e., they make a market in the security Will hold inventory
Works for a specialist firm which is an independent company in the business of trading listed
securities.
Specialists
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How Trades Are Executed
Market-maker is registered to trade in a given security on the NASDAQ Like a specialist
A few stocks Create a market
Like a dealer Holds in inventory the stock.
Dealer functions: Takes a position (long or short) in the asset Provides opportunity to trade immediately Offers price information Serves as auctioneer
Dealer profit is the bid-ask spread. No specific location as with specialists on exchanges—telecommunications link Specialists and market-makers provide continuous market liquidity
Market-Makers
Copyright 2014 Diane Scott Docking 16
How to Read a Stock Quotation
Copyright 2014 by Diane Scott Docking 17
Stock Quote
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
Name Symbol Open High Low Close Net Chg
% Chg Volume 52 Wk High
52 Wk Low
Div Yld P/E
Walmart WMT 78.31 78.78 78.02 78.62 +0.31 +0.40 5,396,525 81.37 71.51 1.92 2.44 16.01
www.finance.yahoo.com and www.wsj.com As of April 25, 2014
Copyright 2014 Diane Scott Docking 18
Stock Quote
YTD %
change Hi Lo Stock Sym DIV Yld% PE Vol 100s Close Net Chg
110.3 121.88 80.06 IBM IBM .56 .6 20 71979 93.77 11.06
Year-to-date Highest Lowest Name Stock Annual Dividend Price- Trading Closing Change in the
percentage price price of stock Symbol dividend yield, which earnings volume stock stock price
change in of the of the paid per represents ratio based during the price on the previ-
stock price stock stock year the annual on the previous ous trading
in this in this dividend as prevailing trading day day from the
year year a percentage stock price close on the
of the pre- day before
vailing stock
price
52-WEEK
Round lots traded
DIV / Close =
.56 / 93.77 =
.597% = .6%
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Stock Indexes
8-20 Copyright 2014 Diane Scott Docking
Stock Market Indexes
A stock market index is the composite value of a group of secondary market-traded stocks
____________-weighted index the Dow Jones Industrial Average (DJIA), composed of 30
companies, is the most widely know stock market index ____________-weighted indexes
NYSE Composite Standard & Poor’s 500 NASDAQ Composite Wilshire 5000
A stock market index is the composite value of a group of secondary market-traded stocks
____________-weighted index the Dow Jones Industrial Average (DJIA), composed of 30
companies, is the most widely know stock market index ____________-weighted indexes
NYSE Composite Standard & Poor’s 500 NASDAQ Composite Wilshire 5000
Copyright 2014 Diane Scott Docking 21
Dow Jones Industrial Average http://www.djindexes.com/ Price-weighted average (aka: equally-weighted)
30 large U.S. firms Divisor: http://online.barrons.com/public/page/9_0210-djhfhravg.html;
http://wsj.com/mdc/public/page/2_3022-djiahourly.html
n
sharePrice
IndexValue
n
1i i
divisor
sharePrice
DJIA
30
1i i
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Example: Price-Weighted IndexE.g.: PWIt Co. Price.sh # shs. o/s
A $ 10 1,000
B $ 50 20,000
C $100 2,000
3 $160
Index = $160 / 3 companies = 53.33
33.533
160
3
1005010
n
sharePrice
PWI
n
1i it
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Example: Price-Weighted Index (cont.)
E.g.: PWIt+1 Co. Price.sh # shs. o/s
A $ 12 1,000
B $ 58 20,000
C $110 2,000
3 $180
Index = $180 / 3 companies = 60.00
% change in Index = (60.00 – 53.33)/53.33 = 12.507%
At t+1, share price changes.
00.603
180
3
1105812
n
sharePrice
PWI
n
1i i1t
Copyright 2014 by Diane Scott Docking
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Example: Price-Weighted Index (cont.)
E.g.: PWIt+2 Co. Price.sh # shs. o/s
A $ 12 $6 1,000 2,000
B $ 58 20,000
C $110 2,000
3 $174
Index = $174 / 2.9 = 60.00Divisor adjusts such that Index is same in PWIt+1
On t+2, A has a 2 for 1 stock split.
00.609.2
174
9.2
110586
divisor
sharePrice
PWI
n
1i i2t
Overall firm value of A did not change, so Index should not change.
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DJIA ComputationAt 4/25/14:
Divisor4/25/14 = 0.15571590201117
DJIA4/25/14 = 16361.46
Components4/24/14= = $2,547.74 (see next slide)
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1i ishare
Price
46.1636111171557159020.0
74.547,2$
divisor
sharePrice
DJIA
30
1i i4/25/14at
Components of DJIA at 4/25/14
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Copyright 2014 by Diane Scott Docking
DJIA Components at April 24, 2014
Ticker Company 4/24/2014MMM 3M Co. 136.56AXP American Express Co. 87.03T AT&T 34.48BA Boeing Co. 128.66CAT Caterpillar Inc. 104.69CVX Chevron 123.99CSCO Cisco Systems Inc. 23.00DD E.I. DuPont de Nemours & Co. 66.66XOM Exxon Mobil 100.41GE General Electric Co. 26.60GS Goldman Sachs 158.24INTC Intel Corp. 26.26IBM International Business Machines Corp. 189.63JNJ Johnson & Johnson 99.79JPM JPMorgan Chase 55.71MCD McDonald's Corp. 100.73MRK Merck & Co. Inc. 57.24MSFT Microsoft Corp. 39.91NIKE Nike 72.70PFE Pfizer Inc. 30.75KO The Coca-Cola Co. 41.01HD The Home Depot Inc. 79.38PG The Procter & Gamble Co. 81.41TRV Travelers Cos. 88.31UTX United Technologies Corp. 117.21UNH UnitedHealth Group, Inc. 75.66VZ Verizon Communications 45.94V Visa 198.93WMT Wal-Mart Stores Inc. 78.62DIS Walt Disney Co. 78.23
2,547.74$
divide by divisor 0.15571590201117Computed DJIA 4/25/14 16361.46
Copyright 2014 by Diane Scott Docking
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Stock Indexes Standard and Poor’s (S&P) (1,863.40 on 4/25/14)
www.standardandpoors.com Value-weighted
S&P 500: 500 large U.S. firms S&P 400: 400 Mid-cap firms S&P 600: 600 Small-cap firms
http://finance.yahoo.com/ current index value
shares #
shares of # sharePrice
VW
n
1i i
Idivisor
n
1i i
shares of # sharePrice
500 P&S
Copyright 2014 by Diane Scott Docking
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Example: Value-Weighted IndexE.g.: VWIt
Co. Price/sh x # shs. o/s = Market Value
A $ 10 1,000 $ 10,000
B $ 50 20,000 $1,000,000
C $100 2,000 $ 200,000
23,000 $1,210,000
Index = $1,210,000 / 23,000 = 52.608696
608696.52000,23
000,210,1$
shares #
shares of # share
Price
VWI
n
1i i
t
Copyright 2014 by Diane Scott Docking
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Example: Value-Weighted IndexE.g.: VWIt+1
Co. Price/sh x # shs. o/s = Market Value
A $ 12 1,000 $ 12,000
B $ 58 20,000 $1,160,000
C $110 2,000 $ 220,000
23,000 $1,392,000
Index = $1,392,000 / 23,000 = 60.521739% change in Index = (60.521739-52.608696)/52.608696 = 15.0413%
At t+1, share price changes.
521739.60000,23
000,392,1$
shares #
shares of # sharePrice
VWI
n
1i i1
t
Copyright 2014 by Diane Scott Docking
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Example: Value-Weighted IndexE.g.: VWIt+2
Co. Price/sh x # shs. o/s = Market Value
A $ 12 $6 1,000 2,000 $12,000
B $ 58 20,000 $1,160,000
C $110 2,000 $ 220,000
23,000 24,000 $1,392,000
Index = $1,392,000 / 23,000 = 60.521739Divisor adjusts such that Index is same as VWIt+1
On t+2, A has a 2 for 1 stock split.
521739.60000,23
000,392,1$shares of #
sharePrice
VWI
n
1i i2
divisort
Overall MV is same so Index should not change
Copyright 2014 Diane Scott Docking 31
S&P 500 Index
See 1950 to present (real time): http://finance.yahoo.com/echarts?s=%5EGSPC#chart1:symbol=^gspc;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
See last 2 years at:
http://finance.yahoo.com/echarts?s=%5EGSPC#chart1:symbol=^gspc;range=2y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Copyright 2014 Diane Scott Docking 32
Types of Orders
Limit order
Stop order
Market orderOther types
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Types of Orders
Market order Limit order Stop order (aka: stop-loss order)
Copyright 2014 Diane Scott Docking 34
Types of Orders
_________________ order At best available price
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Types of Orders
______________order Order to buy or sell a set number of shares at a specified price or
better. Can limit length of time order can be outstanding before being canceled.
Typically cost more than market orders. Recorded in a “limit order book”
A record of unexecuted limit orders maintained by the specialist. BUY limit order – buy only at the designated price or lower
Designated price is _________ than current market price SELL limit order – sell at the designated price or higher
Designated price is _________ than current market price Beneficial because
investors get the specified purchase or sell price. useful on a low-volume or highly volatile stock.
Copyright 2014 Diane Scott Docking 36
Types of Orders
Limit order Buy limit order – buy only at the designated price or lower
Designated price is lower than current market price
PLimit_buy < PMV_current
E.g.: $19 < $20
Buy only at $19 or lower.
If short the stock, take profit and run.
Copyright 2014 Diane Scott Docking 37
Types of Orders
Limit order Sell limit order – sell at the designated price or higher
Designated price is greater than current market price
PLimit_sell > PMV_current
E.g.: $22 > $20
Sell only at $22 or higher.
If long the stock, take profit and run.
Copyright 2014 Diane Scott Docking 38
Limit Order Book for Intel on Archipelago
Copyright 2014 Diane Scott Docking 39
Types of Orders
____________ order (aka: stop-loss order) An order to buy or sell when price surpasses a particular price – at
which point the stop order becomes a market order. Not a 100% guarantee of getting the desired entry/exit price.
E.g., if a stock gaps down (up) then the stop sell (buy) order will be triggered (or filled) at a price significantly lower (higher) than expected
Stop order to BUY – order is not to be executed until the market rises to a designated price Designated price is _______ than the current market price
Stop order to SELL – order is not to be executed until the market falls to a designated price Designated price is _______ than the current market price
Beneficial because Commonly used before leaving for holidays or entering a situation
where unable to monitor their portfolio for an extended period. Ensures a greater probability of achieving a predetermined entry or exit
price, limiting the investor's loss or locking in his/her profit.
Copyright 2014 Diane Scott Docking 40
Types of Orders
Stop order (aka: stop-loss order) Stop order to buy – order is not to be executed until the
market rises to a designated price Designated price is greater than the current market price
PStop_buy > PMV_current
E.g.: $25 > $20
Buy only if price gets to $25.Idea is to buy it before price gets too high:
- Cover a short position before price gets too high, or - Go long (buy the stock) before it becomes too expensive
If price gaps up to $30 may end up buying at $30, than the expected $25; but guaranteed to own the stock.
Copyright 2014 Diane Scott Docking 41
Types of Orders Stop order (aka: stop-loss order)
Stop order to SELL – order is not to be executed until the market rises to a designated price Designated price is lower than the current market price
PStop_sell < PMV_current
E.g.: $15 < $20
Sell only if price fall to $15.
Idea is to sell it before price gets too low: - Get out of a long position. Take profit and run or cut losses.
If price gaps down to $10 may end up selling at $10, than the expected $15; but guaranteed to sell the stock.
Copyright 2014 Diane Scott Docking 42
Types of Orders
Size-Related orders Round lot – 100 shares Odd lot – less than 100 shares Block trade – large trades of 10,000 or mores
shares or MV ≥ $200,000
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Short Selling
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Short Sales
Note that an investor who buys and owns shares of stock is said to be “long the stock” or to have a “long position.”
• Short Sale is a sale in which the seller does not actually own the security that is sold.
Borrowsharesfrom
someone
Borrowsharesfrom
someone
Sell theShares in the market
Sell theShares in the market
Buyshares
From themarket
Buyshares
From themarket
Returnthe
shares
Returnthe
shares
Today In the Future
Copyright 2014 Diane Scott Docking
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Short Sales
An investor with a long position benefits from price increases. Easy to understand You buy today at $34, and sell later at $57, you profit! Buy low, sell high
An investor with a short position benefits from price decreases. Also easy to understand You sell today at $83, and buy later at $27, you profit. Sell high, buy low
Copyright 2014 Diane Scott Docking
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Short Selling In a short sale, investor borrows and sells stock Promises to pay back stock later Short seller hopes stock price declines to provide
gain Short seller covers dividend payments while
borrowing stock Limited gain; unlimited losses
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Example 1: Short Sales
You short 100 shares of Texas Instruments (TXN) at $30 per share. The value of stock borrowed that will be sold short is: $30 × 100 shs
= $3,000 NOTE: YOU MUST PUT UP FUNDS TO SHORT A STOCK!
1) Assume in 1 year the stock has a value of $20 per share. What is your gain/loss?
2) Assume in 1 year the stock has a value of $40 per share. What is your gain/loss?
Copyright 2014 Diane Scott Docking
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Example 1: Short Sales
Assume in 1 year the stock has a value of $20 per share. What is your gain/loss and return?
Sell $30Buy -$20Gain $10 / sh. X 100 shs. = _________________
Copyright 2014 Diane Scott Docking
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Example 1: Short Sales
Assume in 1 year the stock has a value of $40 per share. What is your gain/loss and return?
Sell $30Buy -$40Loss -$10 / sh. X 100 shs. = _______________
Copyright 2014 Diane Scott Docking
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REGULATION OF SECURITIES MARKETS
51 Copyright 2014 Diane Scott Docking
Stock Market Regulations
The Securities and Exchange Commission (SEC) is the primary regulator of stock markets
The main emphasis of SEC regulation is on full and fair disclosure of information on securities
Securities Act of 1933/Securities Exchange Act of 1934 The SEC delegates certain regulatory responsibilities to
the exchanges for the day-to-day surveillance of activity Recently imposed regulations aim to reduce excessive
price fluctuations and increase auditing oversight
The Securities and Exchange Commission (SEC) is the primary regulator of stock markets
The main emphasis of SEC regulation is on full and fair disclosure of information on securities
Securities Act of 1933/Securities Exchange Act of 1934 The SEC delegates certain regulatory responsibilities to
the exchanges for the day-to-day surveillance of activity Recently imposed regulations aim to reduce excessive
price fluctuations and increase auditing oversight
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SEC Oversight of Corporate Disclosure
Regulation Fair Disclosure (FD), October, 2000 Requires corporations to disclose relevant information
broadly to investors at the same time Forbade old practice of providing selected analysts new
information during teleconference calls Means of disclosing new information
Company Web site—Web cast 8-k form filing News release Above simultaneously with conference call