FIN3244 Exam 3 Chapter 8 Securities Markets and Transactions I Introduction trade II A The Buttonwood Agreement signed in 1792 by 24 stockbrokers agreeing to securities on a commission basis the first organized American securities exchange 1 In 1817 renamed the New York Stock Exchange Board then in 1863 The New York Stock Exchange Securities Markets A The forums that allow suppliers and demanders of securities to make financial transactions B Goal Transactions to be made quickly and at a fair price C Types of Security Markets 1 Money Markets where short term debt securities maturities of less than 1 year are bought and sold Short term borrowing and lending 2 Capital Markets where investors buy and sell long term securities such as stocks and bonds a Primary Market new issues of securities are sold to investors offering bankers buying Put a i The issuer of the equity or debt security receives the proceeds from the sale ii Most significant transaction in Primary Market is the Initial Public Offering IPO the first public sale of a company s stock company takes on a public status 1 Must obtain approval of current shareholders 2 Needs investment bank specializes in assisting companies to issue new securities to underwrite Underwriting Syndicate bring in other to share the financial risk associated with and reselling the securities to the public together a selling group responsible for selling portion of the issue and is paid on commission Compensation typically comes in the form of a discount on the Sale Price of Securities 3 Prospectus key aspects of securities to be issues Preliminary prospectus is called red herring 4 Quiet Period restrictions on what can be said about the company From registration to one month after IPO is complete 5 Road Shows presentations to potential investors 6 Risky not necessarily good long term investments iii Sale of additional stock seasoned equity issues already public iv Must register with Securities and Exchange Commission SEC confirms adequacy and accuracy of info before publicly offered v A firm has 3 choices pre 1 Public Offering sale to public investors 2 Rights Offering shares to existing stockholders on rata basis 3 Private Placement No SEC registration sell to pri investors insurance companies investment b Secondary Market Securities traded after they are issued vate management funds pension funds i May sell holdings to another investor does not involve the corporation that issued the securities ii The ability to make security transactions quickly at a fair price provides liquidity iii Nasdaq Market an all electronic trading platform iv Over the Counter Market OTC trading in smaller un securities v Securities Exchanges Forums where buyers and sellers are brought together to execute trades listed III Secondary Markets Broker Markets and Dealer Markets A Broker Markets Consists of national and regional securities exchanges 1 Includes NYSE largest in the world as known as The Big Board NYSE Amex and Regional exchanges reside out of NYC such as the Chicago Stock Exchange larger than NYSE Amex in terms of dollar volume 2 All trading takes place on centralized trading floors 3 60 of total dollar volume of all shares in the U S Stock Market 4 Regional Securities Exchanges Chicago Pacific Philadelphia and Boston B Dealer Markets made up Nasdaq and OTC C Differences in Broker and Dealer Markets IV 1 The biggest difference is dealing with the way trades are executed In Broker Markets the seller sells his securities directly to the buyer with the help of a broker In the dealer market the buyers and sellers are never brought together directly instead they are executed by market makers offer to buy or sell a certain amount of securities at a stated price The New York Stock Exchange A Before 2005 you had to own or lease one of the 1 366 seats to become a member of the exchange B In 2005 NYSE ceased having member seats The existing seat owner received 500 000 in cash and 77 000 shares for its seat C Currently NYSE sells 1 year trading licenses to trade directly on the trade Investments banks and brokerage firms comprise the majority and they typically hold more than one D Commission Brokers execute orders from their firm s customers E Independent Brokers works for himself or herself and handles orders on a fee basis F Trading Activity 1 Floor is about the size of a football field 2 The NYSE floor has trading posts certain stocks trade at each posts 3 An Auction Process izes in 4 Goal to fill all buy orders at the lowest price and all sell orders at the highest price 4 Designated Market Maker DMM an exchange member who special making transactions in one or more stocks Their job is to manage the auction process G Listing Policies 1 Dual Listings Listings on more than one exchange 2 To be listed on the NYSE a firm must have at least 400 stockholders owning 100 or more shares and a minimum of 1 1 million shares of publicly held stock outstanding 3 Must meet SEC requirements 4 Firms that fail to meet requirements may be delisted NYSE Amex A Less stringent than NYSE B Consists of smaller firms C Approximately 500 listed stocks D 2 3 of its daily volume comes from Exchange Traded Funds ETFs baskets of securities that are designed to track an index or the broad stock or bond market a stock industry sector or an international stock but trade like a singe stock E Trades in Stock Options Regional Stock Exchanges A Modeled after NYSE but more lenient B Trading Costs are Lower C Most securities are also listed on NYSE and NYSE Amex D Intermarket Trading System ITS links nine markets five regional exchanges and NYSE NYSE Amex NASDQ and the Chicago Board Options Exchange through an electronic communications network that allows brokers and dealers to make transactions at the best prices A Options allow holders to sell or buy another security at a specified price over a given period of time B Chicago Board Options Exchange C Usually an option to sell of buy a a given security is listed on all five options exchanges Chicago NYSE Amex Boston Pacific and Philadelphia D Deal only in security options A Futures Contracts that guarantee the delivery of a specified commodity or financial instrument at a specific future date at an agreed upon price B Chicago Board of Trade Dealer Markets A No centralized trading floors B Linked together via mass telecommunications network C Securities dealer offers to buy or sell securities at a stated bid ask prices D The bid and the ask price
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