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