Allow entities to save, borrow, issue equity capital, manage risks, exchange assets and utilize information

Determine the return that equates savings and borrowings across the economy

Physical derivative contracts (ex: gold futures) vs. Financial derivative contracts (ex: call option of shares)

Fixed income securities: each share represents debt that will be paid first before equity

Equities: each share represent ownership of companies, gains and loss are based on company's performance

Commodities (real asset)
Ex: Agricultural products, industrial & precious metals, energy products

Connect buyers and sellers of the same securities at the same time and location.

Match sellers and buyers of the same security at different point in time (by maintaining his inventory of the security)

Connect buyers and sellers of same securities, at same time but different venues (market)

Also connect buyers and sellers of non-identical securities of similar risk

Investors obtain greater liquidity, and choose their desired risk level.

create a diversified pool of risk and manage the risk inherent in providing insurance.

is the minimum percentage of equity that a margin investor is required to maintain in his account.

If investor's equity falls below the maintenance margin, he will receive a margin call

Stock Price to receive Margin call: \(=P_{o}\times \frac{1-Margin_{initial}}{1-Margin_{maintenance}}\)

order to execute the trade immediately at the best possible price.

Pro: quickly execute an order, useful when trading based on information
Con: may execute at unfavorable price

order to execute the trade at best possible price that satisfying the limit condition

Primary Market: Newly-issued securities are traded (IPOs and seasoned offerings)

Secondary Market: Where securities are traded after their initial offering. Secondary market provides liquidity and information about value to investors.

Promote common financial reporting requirements, so that information gathering is less expensive

Require minimum levels of capital, so that market participants will able to honor their commitment and be more careful about risk.

Investor: someone expects to earn equilibrium (fair) return over time

Information trader: Someone expects to earn positive risk-adjusted returns (i.e., active management strategy)

Hedger: someone takes on a position to offset an existing risk

Financial Assets (e.g. securities, currencies, derivatives,etc.) vs. Real Assets (e.g. real estate, commodities, etc.)

Call market: Not a lot of liquidity. Buy/sell orders are accumulated, then price is set that clears the market

Continuous Market: Trading takes place continuously during the market-open period. Price is set by auction or by dealer bid-ask quote

Alternative Investment Market: Private equity, hedge fund, commodities market

Mutual funds (including Real Estate Investment Trust, a.k.a. REITs)

Asset-backed securities: securities are backed with financial assets

Stand behind both sides of trade, guaranteeing the doing of the contracts

Short seller's profit = original selling price - repurchase price (including interest and commissions)

Short-sellers pay all dividends to the lender (only benefit from price difference)

Equity percentage: = \(\frac{Stock.Value - Loan}{Stock.Value} \)

Meaning: Ignoring transaction costs and commissions, an increase of 1% in stock price will cause a A% increase in equity investment return

2. Calculating net cash to be received at the end of period (after deducting interest payment, principal payment, transaction costs, etc.)

3. Return on margin transaction = \( \frac{Cash.Return}{Initial.Cash.Invested} \)

A trade accepting a current bid or offer is said to "take" the market

is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.

Ex: "Stop 50, limit 55 buy" order: the stop order will become market order if stock price reach 50, and will buy as long as price \(\leq \) 55

Trailing-stop: the stop break point move up as the stock price increases.
Ex:
10% stop for a stock at 40 will be executed at price 36
trailing-10% stop: if stock increase to 42, then the new stop-price will be 37.44 (if there is a sudden fall)

borrow an asset, sell it and then later buy back at lower price to benefit from the drop in price.

Bank guarantees that the issued securities will be sold at negotiated price (between the bank and issuer)

Firm sells securities directly to qualified investors, without disclosures of public offering

Investor trade with dealers that maintain inventories of securities, currencies or contracts.

Order-matching and trade-pricing rules are used to match the orders of buyers and sellers.

Brokers find a counter party to take the other side of a sell or buy order

savers receive a return, borrowers can obtain capital, hedgers can manage risks, and traders can acquired needed assets

Maximum leverage ratio = \( \frac{100\%}{\%.Of.Minimum.Margin.Requirement}\)

Iceberg orders are large orders that are split up into lots or small sized limit orders. They are split up into visible and hidden parts, with the latter hidden orders only transitioning to visibility after the former type of order is executed.

Price (high vs. low)→ Display precedence (Hidden or not) → Time (sooner or latter)