Organisation and functioning of securities markets (Chapter 3)
market
government bond issues
trading
does not necessarily own the goods and services involved
deal in any variety of goods and services
need not have a physical location
characteristics of a good market
liquidity
low transaction costs
timely and accurate info on price and volume
prices that rapidly adjust to new info
organisation of the securities market
primary markets: new securities are sold
secondary markets: outstanding securities are bought and sold
treasury notes: original maturities of 2 to 10 years
treasury bonds: original maturities of more than 10 years
treasury bills: original maturity 1 year or less
corporate stock issues
initial public offerings (IPOs): firm selling its common stock to the public for the first time
new issues (seasoned or IPOs): listed on stock exchanges and simply decides to release additional stocks or debt instruments
algorithmic trading (AT): creating computer programs to make trading decisions
High-frequency trading (HFT)
programming that would trade based on important company news or macro-economic events
buying in one market and selling in another simultaneously
smaller bid-ask spreads
lower transaction costs
bring significant liquidity
orders and margin
market orders: an order to buy or sell a stock at the best current price
market sell order: willingness to sell immediately at the highest bid available at the time the order reaches a registered exchange
market buy order: indicates that the investor is willing to pay the lowest offering price available at the time of the order
limit orders
good for parts of the day, full day, several days, week, month
open ended, or good until cancelled (GTC)
instantaneous
stop loss order: a conditional market order whereby the investor directs the sale of a stock if it drops to a given price
stop buy order: an investor who wants to minimise his or her loss if the stock begins to increase in value would enter stop buy order at a price above short-sale price
short sales: sale of stock not owed with the intent of purchasing it back later at a lower price
margin transactions: pays for stock with some cash and borrows the rest through the broker, thus putting up the stock for collateral
initial margin: part of a transaction's value that a customer must pay to initiate the transaction with the other part being borrowed from the broker
maintenance margin: % of a security's value that must be on hand as equity
margin: part of transaction value that a customer has equity in transaction
amount investor puts up / value of the transaction
value of your equity / value of stock hold
(market value - debit balance) / market value
market value = price per share x no. of shares
minimum maintenance margin
specified by the Federal Reserve as 25%
if stock price falls below 25%, account is under- margined and will receive margin call to provide more equity
if investors doesn't respond with required funds in time, stock will be sold to pay off loan
time allowed to meet margin call
varies between investment firms
affected by market conditions
volatile market conditions: time can be shortened
actual margin = (current value of securities - amount borrowed) / current value of securities
margin call
demand from broker for additional cash or securities due to actual margin < maintenance margin
MC price = amount borrowed / number of shares (1 - maintenance margin %)
short sales and margin call price
short seller must pay any dividends due to the investor who lent the stock
short seller must post the same margin as an investor who had acquired stock
margin can be in cash or any unrestricted securities owned by the short seller
% margin = value of your equity / value of stock owned
total profit = total return - total investment
profit = ending value - beginning value + dividends - transaction costs - interests
your investment = margin requirement + commission