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    Chapter-8, Stock Markets

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    Muhammad Ali Bhojani
    Primary and secondary stock markets allow companies to raise equity capital and are the most closely watched financial markets. The three major US stock exchanges are the NYSE Euronext, NASDAQ, and AMEX. NYSE Euronext uses a floor trading model with specialist market makers, while NASDAQ has no physical floor and uses computerized trading. Secondary markets allow existing stocks to be traded among investors.

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    Attribution Non-Commercial (BY-NC)
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    Chapter-8, Stock Markets

    Uploaded by

    Muhammad Ali Bhojani
    573 views20 pages
    Primary and secondary stock markets allow companies to raise equity capital and are the most closely watched financial markets. The three major US stock exchanges are the NYSE Euronext, NASDAQ, and AMEX. NYSE Euronext uses a floor trading model with specialist market makers, while NASDAQ has no physical floor and uses computerized trading. Secondary markets allow existing stocks to be traded among investors.

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    Continuation of Series Stock Markets by Muhammad Ali Bhojani

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    Primary and secondary stock markets allow companies to raise equity capital and are the most closely watched financial markets. The three major US stock exchanges are the NYSE Euronext, NASDAQ, and AMEX. NYSE Euronext uses a floor trading model with specialist market makers, while NASDAQ has no physical floor and uses computerized trading. Secondary markets allow existing stocks to be traded among investors.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    573 views20 pages

    Chapter-8, Stock Markets

    Uploaded by

    Muhammad Ali Bhojani
    Primary and secondary stock markets allow companies to raise equity capital and are the most closely watched financial markets. The three major US stock exchanges are the NYSE Euronext, NASDAQ, and AMEX. NYSE Euronext uses a floor trading model with specialist market makers, while NASDAQ has no physical floor and uses computerized trading. Secondary markets allow existing stocks to be traded among investors.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 20

    ÷ 

    

      

    
      — m 
      
    

      

    ‡ Primary stock markets allow suppliers of funds to raise


    equity capital
    ‡ Secondary stock markets are the most closely watched and
    reported of all financial markets
    ‡ Stockholders are the legal owners of a corporation
    ± have a right to share in the firm¶s profits (e.g., through dividends)
    ± are residual claimants
    ± have limited liability
    ± have voting rights (e.g., to elect board of directors)

    
      — m 
      

      

    ‡ The returns on a stock over one period (2 ) can be divided


    into capital gains and dividend returns:

    @
    º @ º

    @
    @ 
    @ º
    @ º

     = stock price at time


     = dividends paid over time   to
    Ô         = capital gain over time   to
         = return from dividends paid over time   to

    
      — m 
      
    
    
    
    

    ‡ Common stock is the  


      in a
    public or private corporation
    ‡  are discretionary and are thus not guaranteed
    ‡ Common stockholders have the lowest priority claim in
    the event of bankruptcy (i.e., a  
    ‡ !  " # implies that common stockholders can
    lose no more than their original investment
    ‡ Common stockholders control the firm¶s activities
    indirectly by exercising their 
    $ $  in the election
    of the board of directors

    
      — m 
      
    
    
    
    

    ‡    have two classes of common shares


    outstanding, with different voting rights assigned to each
    class
    ‡ With   
    $, the number of votes assigned to
    each stockholder equals the number of shares held
    multiplied by the number of directors to be elected
    ± the number of shares needed to elect Ô directors, Ô, is:
    Ô = [(Ô ÿ   of shares outstanding)/(  of directors to be elected +

    )] +

    ‡ A 
    &# 
     allows stockholders to vote by absentee
    ballot (e.g., by mail)

    
      —% m 
      
    ( 
    

    ‡ (  
     is a hybrid security that has
    characteristics of both bonds and common stock
    ‡ Generally has &  that are paid
    quarterly
    ‡ Generally 
     
     
    $ $  unless
    dividend payments are missed
    ‡ )
      $ versus   $
    ‡   versus 
     

    
      —' m 
      
    (#
      

    ‡ (#   are markets in which corporations raise


    funds through new issues of stock, most of the time
    through   "
    ‡ Investment banks act as distribution agents in " 
     
     $
    ‡ Investment banks act as principals in  
     
     $
    $
     
     ±  
     =  + 
    ‡ A #  is a group of investment banks working in
    concert to issue stock; the lead underwriter is the

    $ $ 
    

    
      —* m 
      
    (#
      

    ‡ An   "


    $ Ô ( is the first public issue
    of financial instruments by a firm
    ‡ A 
    
    $ is the sale of additional securities by
    a firm whose securities are already publicly traded
    ±   $  give existing stockholders the ability to
    maintain their proportional ownership
    ‡ A  $ 
      is a preliminary version of the
    prospectus that describes a new security issue
    ‡  $  
     allows firms to offer multiple issues of
    stock over a two-year period with only one registration
    statement

    
      —— m 
      
    
    #
      

    ‡ 
    # 
       are the markets in
    which stocks, once issued, are traded among
    investors
    ‡ The U.S. has three major stock markets
    ± the ) -
    
     .&$ .
    & Ô)- .
    .
    & 
    ± the ) 
     /
     
    
      
    /
      0
     
     Ô)/ /0
    ± the /
     .&$ Ô/.1

    
      —, m 
      
    )- . .
    &

    ‡ Created by the $ of )- . 3


    4 5 and
    .
    & )565 on April 4, 2007 to become the first
    truly global stock market
    ‡ Over 3,200 different stocks trade on NYSE Euronext
    ‡ Trading occurs at a specific place on the floor of the
    exchange called a $ 
    
    ‡ Each stock has a special market maker called a
     that maintains liquidity for the stock at all
    times

    
      — 2 m 
      
    )- . .
    &

    ‡ Three types of transactions occur at trading posts


    ± a 
     is an order to transact at the best price available
    when the order reaches the trading post
    ± a 
     is an order to transact at a specified price
    ± specialists transact for their own account
    ‡ (
    $ $ is the simultaneous buying and selling
    of a portfolio of at least
    different stocks valued at more
    than $
    million using computer programs to initiate the
    trades
    ‡  " give investors time to make informed
    choices during periods of high market volatility

    
      —  m 
      
    7$
     )- . .
    &
     /.1

    Order Order Order


    Investor Shares Broker Shares Comm. Shares Market
    or Maker or
    Cash Cash Floor Cash Other Floor
    Broker Broker

    
      —  m 
      

      0
    

    ‡ Name ‡ Volume
    ‡ Symbol ‡ 2 Wk High
    ‡ Open ‡ 2 Wk Low
    ‡ High ‡ Div
    ‡ Low ‡ Yield
    ‡ Close ‡ P/E
    ‡ Net Chg ‡ YTD % Chg
    ‡ % Chg

    
      —  m 
      
    /.1

    ‡ Generally lists smaller firms than NYSE Euronext


    ‡ Operates as a broker-specialist market-maker
    system similar to NYSE Euronext
    ‡ Pioneered &$   Ô.78
    ± ETFs are index funds that are listed on an exchange
    and can be traded intraday

    
      —  m 
      
    )/ /0  7  
    ‡ NASDAQ is the 
    +   
      and has
    no physical trading floor
    ‡ Provides continuous trading for the most active stocks
    traded
      
      Ô7
    ‡ Primarily a dealer market in which often more than 20
    dealers act as market makers
    ‡ A 
     & 
     #  Ô .  provides
    automatic order execution for orders of less than or equal
    to
    ,000 shares
    ‡ The NASD maintains an electronic ³7 " 
    "
    ´ and ³  ´ for small firms that are not part
    of the NASDAQ

    
      — % m 
      
    
    #
      

    ‡ Choice of market listings


    ± NYSE has extensive listing requirements (e.g., firm market value
    and trading volume)
    ± AMEX listing requirements are less stringent than NYSE and
    NASDAQ requirements are even less so
    ‡ . 
     
     
      
     Ô.)
    ± normal trading occurs between 9:30 a.m. and 4:00 p.m. eastern
    standard time
    ± extended-hours trading occurs through computerized   
    $ #  Ô/7  a.k.a. ECNs
    ‡  $ via the internet is becoming increasingly
    popular to both individual and professional investors

    
      — ' m 
      

      &

    ‡ A 
      & is the composite value of a group
    of secondary market-traded stocks
    ‡ ( $  &
    ± the Dow Jones Industrial Average (DJIA), composed of 30
    companies, is the most widely know stock market index
    ‡ 6 $  &
    ± NYSE Composite
    ± Standard & Poor¶s 00
    ± NASDAQ Composite
    ± Wilshire 000

    
      — * m 
      

      

    ‡ Households, mutual funds, and private pension


    funds are the largest holders of corporate stock
    ‡ Does the stock market forecast the economy?
    ‡   # is the speed with which
    financial security prices adjust to unexpected
    news
    ± weak form market efficiency
    ± semistrong form market efficiency
    ± strong form market efficiency

    
      — — m 
      

      $ 
    

    ‡ The    .&$ 


    
     Ô . is the
    primary regulator of stock markets
    ‡ The main emphasis of SEC regulation is on full and fair
    disclosure of information on securities
    ‡   /
    ,   .&$ /
    ,
    ‡ The SEC delegates certain regulatory responsibilities to
    the exchanges for the day-to-day surveillance of activity
    ‡ Recently imposed regulations aim to reduce excessive
    price fluctuations and increase auditing oversight

    
      — , m 
      
      
     / 


      
    ‡ U.S. stock markets are the world¶s largest
    ‡ European markets have increased their share of the global
    market with the advent of a common currency, the Euro
    ‡ Growth has recently strengthened in the U.K., Canada,
    Japan, and Pacific Basin countries
    ‡ International stock markets allow investors to diversify by
    holding stocks issued by corporations in foreign countries
    ‡ International diversification can increase risk due to
    incomplete information about foreign stocks as well as
    foreign exchange and political risk

    
      — 2 m 
      

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