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342 Chapter 18
342 Chapter 18
Common stock
equity security
ownership entitled to distributed earnings entitled to share of assets
I. Type of Markets
exchanges OTC trading of unlisted stocks & listed stocks direct trading
Exchanges
NYSE
floor 20 posts, trading about 100 stocks each stock has one specialist 10 specialist firms, 470 specialists each specialist has 5-10 stocks process trades from floor brokers (5%) and electronically (95%)
MUST maintain a fair and orderly market for stock act as buyer or seller as needed (10% of trades) match buyers and sellers maintain order priority
AMEX
Regional exchanges
OTC markets
Nasdaq
Types of orders
brokers market order buy/sell order to be executed at best price -- get lowest price for buy order -- get highest price for sell order
limit order
buy/sell order where investor specifies price range buy at $50 or less sell at $52 or more specialist records orders in limit order book
investor sets reservation price BUT no guarantee that limit order will be executed
stop order
order lies dormant turns into market order when certain price (the stop) is reached buy if price rises to $60 sell if price falls to $58 -- stop loss order
market but in a volatile market stop could be triggered prematurely -- end up trading unnecessarily
order size
round lots
lots of 100 shares odd lots less than 100 shares more difficult to trade block trades 10,000 shares or $200,000 value
short selling
destabilize falling prices tick test rules on exchange short sales allowed if uptick or zero uptick in price for previous trades: $20.75, $21 (uptick) $20.75, $20.75 (zero upick) $20.75, $20 (downtick)
so short sellers
believe price will fall and SOON but price not currently falling face unlimited losses if price rises
price of stock, using stock as collateral borrow at call money rate Fed sets initial margin requirement minimum cash payment 50% since 1975
example
Institutional trading
block trades
program trades
what is frontrunning?
example
agency basis
brokers bid for trade by commission low commission, but frontrunning likely
DJIA
S&P 500
500 large blue chip companies value weighted most popular benchmark for index
funds
inclusion of stock based on objective criteria market value Wilshire 5000 all publicly traded stocks Russell 2000 largest 3000 companies, then take smallest 2000 of those
current stock prices? what implications does this have for active vs. passive investment strategies?
implication
evidence
efficient technical analysts do not beat the market especially after trading costs
implication
evidence
mixed Yes
most actively managed portfolios do not outperform randomly selected portfolios
No.
certain pricing anomalies persist for long periods of time January effect size effect
implication
evidence
active strategy
analysis to select stocks to buy/sell growth, sector, value funds trading on this info increases trading costs tax consequences odds of working are low
passive strategy
capture long-run returns of market buy-and-hold diversified portfolio index funds lower expenses, defer taxes index funds outperform most actively managed funds