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Chapter 4

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

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Chapter 4

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  1. Chapter 4 The Role of Securities Markets

  2. Security Markets • Organized exchanges • NYSE and the AMEX • The listing of securities • Over-the-counter markets (e.g., Nasdaq)

  3. Market Makers - Security Dealers - Specialists • Offer to buy and sell for their own accounts • The spread - the difference between the bid and ask prices

  4. Market Makers • Do not set the level of prices • Facilitate security transactions

  5. Buying and Selling Securities • The role of brokers • full service brokerage firms • discount brokers • electronic trading • The difference between • a broker • a security dealer

  6. Security Transactions The reporting of transactions

  7. Types of Orders • Market orders • Assured transaction • Limit orders • Specified price • Transaction may not occur

  8. Settlement • Confirmation statements • T + 3: Settlement date • Delivery versus holding securities in street name

  9. The Cost of Investing • Commissions • Full service brokers • Discount brokers • On-line brokers • The spread

  10. Cash Versus Margin Accounts • Leveraging the position • Increased potential return • Increased risk

  11. Margin Requirements • Initial margin requirement • Margin call

  12. Long and Short Positions • The long (bullish) position • Anticipating prices rising • The short (bearish) position • Anticipating prices falling

  13. The Short Sale • Sale of borrowed securities • To close position: • Purchase the stock and return the borrowed securities

  14. Measures of Security Prices • Dow Jones Industrials • S&P 500 Stock Index • New York Stock Exchange Index

  15. Construction of Indices • Questions concerning: • What securities to include • How index is computed • Can produce different measures of stock performance

  16. Price Movements and Graphs • How stock prices appear to have changed is affected by the presentation • Impact of absolute and relative scales

  17. Dow Jones Industrial Average Absolute Scale Relative Scale

  18. Price Movements and GraphsAbsolute Scale Dow Jones Industrial Average

  19. Russell 1000 Russell 2000 Russell 3000 S&P 400 MidCap S&P 600 SmallCap S&P 1500 Nasdaq Index Wilshire 5000 Index Additional Aggregate Measures of the Stock Market

  20. Regulation - The Federal Security Laws • Full disclosure laws: Importance of information • 10-K report • The annual report • Illegal use of inside information

  21. The Securities and Exchange Commission (SEC) • Enforces the federal security laws • New issues • Trading in securities • Can suspend trading

  22. The Securities Investor Protection Corporation • Insures accounts against failure by brokerage firms • Similar to FDIC • Brokerage firms may carry additional insurance

  23. 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

  24. Efficient Markets • Easy entry and exit • Information disseminated rapidly • Price change occur quickly

  25. Efficient Markets

  26. Efficient Market Hypothesis • Current price properly values a stock • Cannot expect to consistently out perform

  27. Efficient Market Hypothesis • Empirical results supports the hypothesis • Exceptions “anomalies” to efficient market hypothesis

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