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CHAPTER 7

CHAPTER 7. SECONDARY MARKETS. Fuctions of the Secondary Markets. It provides information about the value of the security . It provides liquidity to the investors . It provides information to the investors about the assets fair values .

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CHAPTER 7

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  1. CHAPTER 7 SECONDARY MARKETS

  2. Fuctions of the Secondary Markets • Itprovidesinformationaboutthevalue of thesecurity. • Itprovidesliquiditytotheinvestors. • Itprovidesinformationtotheinvestorsabouttheassetsfairvalues. • Itbringstogethermanyinterestedpartiesandso can reducethecost of searchinglikelybuyersandsellers of theasset. • Byaccomadatingmanytradestheykeepthecost of transactionslow. Bythiswaytheyancourageinvestorstopurchaseassets.

  3. Trading Locations • Secondary market exist throughout the world. • In US, many shares are traded on major national and regional stock exchanges. Additional significant trading in stocks take place on OTC markets. Some bonds are traded on exchanges however most bonds are trade on OTC markets. • Londan International Stock Exchange is an OTC market. Assets that are traded in this market include stocks of domestic and international firms, bonds and options. • Germany has 8 stock exchanges, the most important of which is Frankfurt Stock Exchange. • Paris Bource is the France’s main secondary market for stocks, bonds and some derivative instruments. • Japan has 8 exchanges, the largest is Tokyo Stock exchange and the second largest is Osaka Stock Exchange.

  4. Market Structures • Many secondary markets are continuous markets: prices are determined continuesly throughout the trading day as buyers and sellers submit orders. • A contrasting market structure is the call market, in which orders are batced or grouped together for simultaneous execution at the same price. The market maker can hold an auction for a stock.

  5. Perfect Markets • Inperfect market, thenr. of buyersandsellers is sufficientlylargeandallparticipantsaresmallenoughrelativetothe market, sothatnoone can influencetheprices. • Inperfect market transactioncostsandtaxes (frictions) do not effectthepricesandinvestor’sbehavior.

  6. SECONDARY MARKET TRADING MECHANISM Types of Orders Market Order Limit Order Stop (Stop-Loss) Order Stop-limit • Market Order: It is an order to buy or sell the security at the best price available. When this order reaches to the trading floor, its execution is sure and immediate.

  7. Limit Orders: These are the orders to buy or sell a security at a specified price or better. To avoid the danger of the market order which is the adverse unexpected price changes between the time investor places the order and the time the order is executed, an investor can place the limit order. A buy limit order indicates that the security may be purchased only at the designed price or lower. A sell limit order indicates that the security may be sold only at the designed price or higher. For exp. You want to buy stock A at $42 and do not want to pay more than this amount, you places a limit order at $42. Or you want to sell stock B at $65 and do not want to sell less than this amount, you places a limit order at $65. There is no guarantee it will be executed at all.

  8. Stop Order (Stop-loss order):The order is not to be executed until the market moves to a designed price, at which time it becomes a market order. A stop order to buy specifies that the order is not to be executed until the market rises to a designated price. A stop order to sell specifies that the order is not to be executed until the market price falls below a designated price. For exp. You are uncertain about buying the stock of A at its current price of $42 but want to be sure that if the price moves up you do not pay more than $45. If you places a stop order to buy at $45, the order becomes a market order when the price reaches $45. If you want to assure that you will not sell stock B at less than $60, you can place a stop order to sell at $60. - Security prices sometimes exhibit abrupt price changes, so the direction of a change in a security’s price may be temporary. - Once a designated price is reached, the stop order becomes a market order and is subject to the uncertainity of the execution price.

  9. Stop-limit Orders: Combination of stop order and limit orders to buy or sell at a specified price or better only after a given stop price has reached. • In contrast to the stop order, which becomes a market order if the stop is reached, the stop limit order becomes a limit order if the stop is reached. • Buy stock A “$42 stop, $45 limit”, If the market price reached $42, the broker enters a limit order to be executed at $45 or better (lower) price.

  10. Market Efficieny • Operational Efficiency: In this market investors can obtain transaction services as cheap as possible. • Pricing (Information) Efficiency It refers to a market where pricesimmediatelyandfullyreflect all available information that is relevant to thevaluation of securities.

  11. E. Famaclassifiedthepricingeffciency of a market intothreeforms: weak, semi-strongandstrong. • Weak form efficiency:theprice of thesecurityreflectsthepastpriceandtradinghistory of thesecurity. • Semi-strong form efficieny:Inadditiontothehistoricalprice, theprice of thesecurityfullyreflectsallpubliclyavailableinformation. • Strong form efficieny:thepricereflectsallinformationthat is availableandunavailablepublicly.

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