Finance 301 1st Edition Lecture 14Outline of Last Lecture I. Stock exchangesII. Monitoring publicly traded companiesIII. Market for Corporate ControlIV. Globalization of Stock MarketsOutline of Current LectureV. Stock Market TransactionsVI. Margin Trading- Stock Price IncreasesVII. Margin Trading- Stock Price DecreasesVIII. Cash PurchasesIX. Stock Market TransactionsCurrent LectureI. Stock Market Transactionsa. Short Sellingi. What does this mean? You can short sell a stock you sell someone elses stock. Place an order with your broker you are betting that the price is going to fall. They use one of their other customers stock or their own stock or another brokers customers stocks. Sell it for 20 you want to buy it back at 15. Do not do for long periods of time, 3 months or less you are betting against a company. 10 percent of the market is short sell. Barnes and Noble and GameStop. They would do this because the value of companygoes down since you can buy things through technology. Electronic Books. Online Games. ii. What is the risk?1. Having to pay other persons dividend. Stock price not falling. Price can increaseiii. Restrictions on Short Selling1. Concerns about Short Selling - When the credit crisis intensified in 2008, hedge funds and other investors took large short positions on many stocks. What would happen here? The price would go down because people are dumping the stock, makes the price continue to drop 2. In October 2008, the SEC required that short-sellers borrow and deliver the shares to the buyers within three days. This rule is important because there were many cases in which brokerage firms were allowing speculators to engage in naked shorting. 3. In 2009, the SEC also reinstated the uptick rule (previously eliminated in 2007), which prohibits speculators from taking a short position except after the stock price increases. iv.II. Margin Trading- Stock Price Increasesa. Return = (SP – INV – Loan + D)/INVb. Assume the following:i. PP = $40ii. D = $1iii. M = 50%iv. Interest = 10%v. SP = $60vi. Return = (60- (40/2)- 22 (loan plus interest) + 1)/ 20= 19/20= 95% return Good leveragec.III. Margin Trading- Stock Price Decreasesa. Return = (SP – INV – Loan + D)/INVb. Assume the following:i. PP = $40ii. D = $1iii. M = 50%iv. Interest = 10%v. SP = $30c. Bad leverage 30-20-22+1/20 = -11/20= -.55=-55% return d.IV. Cash Purchasesa. Assume that we are investing with cash and not on margin. What are the returns?b. Increasing Pricesi. Return = 60-40+1/40 = 21/40 = 52.5% No debtc. Declining Pricesi. Return = 30-40+1/40 = -9/40= -22.5% returnd. Borrow half shares so you can buy half shares of another stock. V. Stock Market Transactionsa. Placing an Order - To place an order to buy or sell a specific stock, an investor contacts a brokerage firm.i. The investor communicates the order to the broker by specifying (1) the name of the stock, (2) whether to buy or sell that stock, (3) the number of shares to be bought or sold, and (4) whether the order is a market or a limit order.ii. What is a bid quote? Someone trying to buy the stock. iii. What is an ask quote? this is how they set the prices. Someone is trying to sell the stockiv. What is a market order? paying market pricev. What is a limit order? sets min or max price you are going to pay usually last for that dayvi. As 95, Bid 94 asking for 95 but I am not selling, I am bidding 94 butI am not buying. On limit order, the ask is the seller, the bid is the buyer. On the market order The bid is the seller, the ask is the buyer. vii. The Federal Reserve imposes initial margin requirements, which means we must have a certain % of cash. What is this percentage? 50 percentviii. Margin account – buying with borrowed money, you generally have to have 50 percent of the money and then you can borrow 50 percent. You have to set up a margin account.ix. Maintenance margin x. Margin Call – if stock is half of what it was they will call it xi. Stop-Loss Order - to protect gains or to limit losses.1. Investor specifies a selling price that is lower than the current market price of the stock.xii. Stop-Buy Order1. Investor specifies a purchase price that is Higher the current market price.xiii. Why use this?1. Bought stock at 20 dollars, do not wanna loose more than 10 percent on any stock, place a stop loss order which would be 18. It protects your loses; it is like setting a