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• • • • Function of Secondary Markets Trading Locations Market Structures Perfect Markets
There are actually two levels of the capital markets in which investors participate:
• Primary Markets • Secondary Markets
• Businesses and governments raise capital in primary markets , selling stocks and bonds to investors and collecting the cash.
• In secondary markets, investors buy and sell the stocks and bonds among themselves.The issuer of the asset doesn’t receive funds from the buyer.
Functions of Secondary Markets
• • • • • Provides regular information about the value of security. Helps to observe prices of bonds and their interest rates. Offers to investors liquidity for their assets. Secondary markets bring together many interested parties. It keeps the cost of transactions low.
TRADING LOCATIONS .
LONDON INTERNATIONAL STOCK EXCHANGE .
FRANKFURT STOCK EXCHANGE .
PARIS BOURSE .
TOKYO STOCK EXCHANGE .
ISTANBUL STOCK EXCHANGE .
prices are determined continuously throughout the trading day as buyers and sellers submit orders. . • Call market. in which orders are batched or grouped together for simultaneos execution at the same price.A market maker holds an auction for a stock at certain times in the trading days.MARKET STRUCTURES • Continuous markets.
at 11:00 of the same trading day. the market clearing price goes up $80 with different order flows.(example for continous markets) .• Example:Given the order flow at 10:00.the market clearing price of a stock may be $70.
These fixes take place at the two call auctions which are held daily. .• Example:London gold bullion market. and records prices set at the ‘morning fix’ and the ‘afternoon fix’. which is a call market.
all buyers and sellers are price takers and market price is determined at the point that supply equals demand. .PERFECT MARKET • In perfect market.
. • Firms and customers act individually to maximize their position. • Producers and consumers have perfect knowledge of events in the market. • There are no barriers to entry or exit.FEATURES OF PERFECT MARKETS • There are many buyers and sellers so that no one individual can influence market price.
SECONDARY MARKET TRADING MECHANICS TYPES OF ORDERS .
The priority rule is based on the time of arrival of the order. .Buyers give priority offering lower price. If there are more than one order at the same price. Sellers give offering higher price.1-Market Orders The simplest type of order is the market order.If more buy orders and sell orders reach market at the same time.an order executed at the best price available in the market. the price can obtain.
The danger of a market order is that an adverse move may take place between the time the investor places the order and the time the order is executed. .
2-Limit Orders It designates a price treshold for the execution of trade. A buy limit order indicates that the security may be purchased only at the designated price or lower.It is a conditional order. . A sell limit order indicates that the security may be sold at the designated price or higher.
The designated price may not be obtainable.The danger of limit order is that it comes with no guarantee it will be executed at all. .
3-Stop Order Stop order specifies that the order is not be executed until the market moves to a designated price at which time it becomes a market order. A stop order to buy specifies that the order is not to be executed until the market rises to a designated price. A stop order to sell specifies that the order is not to be executed until the market price falls below a designated price. .
2-Stop order can be subject to the uncertainty of the execution price. .Two dangers of stop order: 1-Security prices sometimes exhibit abrupt price changes.
4-Market if Touched Orders This order becomes a market order if a designated price is reached.However.a market-if-touched order to buy becomes a market order if the market falls to a given price. .A market-if-touched order to sell becomes a market order if the market rise to a specified price.
.5-Time Specific Order Orders may be placed to buy or sell at the open or close of trading for the day that is time specific orders.
. An odd lot is defined as less than a round lot.000 shares of a given stock.orders are also classified by their size. A round lot is typically 100 shares of a stock.6-Size Related Orders For common stock. A block trade is defined as an order of 10.
SHORT SELLING Suppose that an investor expects that the price of a security will decline and wants to benefit should price actually decline. WHAT CAN THE INVESTOR DO .
.This practice of selling securities that are not owned at the time of sale is referred to as selling short.The investor may be able to sell the security without owning it. A profit will be realized if the purchase price is less than the price that the investor sold short the security.
.Tick test rules designate when a short sale may be executed in order to prevent investors from destabilizing the price of a stock when the market price is falling.
(It is referred to as a zero uptick.A short sale can be made only when either 1-The sale price of the particular stock is higher than the last trade price(It is referred to as an uptick trade) 2-There is no change in the last trade price of particular stock and the previous trade price must be higher than the trade price that preceded it.) .
What is Margin Transactions? • Investors can borrow cash to buy securites themselves as collateral.000 buy buy 500 shares 500 shares .000 $ 10. Brown has borrowed $ 10. • Mr.
• A transaction in which an investor borrows to buy additional securities using the securities themselves as collateral is called buying on margin. .
The interest rate that banks charge brokers for these transactions is known as the call money rate (also called the broker loan rate). and the broker gets the money from a bank. .The funds borrowed to buy the additional stock will be provided by a broker.
Margin requirements • The initial margin requirements is the proportion of the total market value of the securities that the investor must pay for in cash. • Maintenance margin requirement is the minimum amount of equity needed in the investor’s margin account as compared to the total market value. .
Role of brokers and dealers in real markets .
Brokers • A broker is an entity that acts on behalf of an investor who wishes to execute orders. a broker is said to be an “agent” of the investors. . In economic and legal terms.
by negotiating prices. .and by executing order. by bringing wiilling buyers and sellers together.• Brokers aid investors by collecting and transmitting orders to the market. The fee for these service is the broker’s commission.
. 1. The security’s price may change abruptly even if there has been no shift in either supply or demand for the security. Buyers may have to pay higher than market-clearing prices if they want to make their trade immediately.Dealers as market makers • Unmatched or unbalanced flow causes two problems. 2.
who stands ready and willing to buy a financial asset for its own account.• The fact of imbalances explains the need for the dealer or market maker. .
1. They provide the opportunity for investors to trade immediately rather than waiting for the arrival of sufficient orders on the other side of the trade(“immediacy”) and dealers do this while maintaining short-run price stability (“contunity”) .Dealers perform 3 functions in markets.
Incertain market structures. . dealers serve as auctioneers in bringing order and fairness to a market.2. Dealers offer price information to market participants 3.
.What factors determine the price dealers should charge for the services they provide? (bid-ask spread) • One of the most important is the order processing costs incurred by dealers.
. A dealer’s position may involve carrying inventory of a security(a long position) or selling a security that is not in inventory(a short position).• Dealers have to be compensated for bearing risk.
MARKET EFFICIENCY • Operationally efficient market • Pricing efficient capital market .
.OPERATİONAL EFFICIENCY In an operationally efficient market investors can obtain transaction services as cheaply as possible given the costs associated with furnishing those services.
• France adopted a system of negotiated commissions for large trades in 1985. • İn 1986 London Stock Exchange abolished fixed commissions. .• Firstly United states exchanges were forced to adopt a system of competitive and negotiated commissions.
PRICING EFFICIENCY • Pricing efficiency refers to a market where prices at all times fully reflect all available information that is relevant to the valuation of securities .
EXPECTED RETURN The expected return = .
50+2/10 3. Dividents of company is 1.50 TL.EXAMPLE initial price of share is 10 TL.5/10 = % 35 is rate of expected return . The end of the year share price will be 12 TL. The expected return = 1.
Pricing efficiency of a market was classified in three forms.THREE FORMS In defining the relevant information set that prices should reflect. • Weak efficiency • Semi-strong efficiency • Strong efficiency .
. • Keen investors looking for profitable companies can earn profits by researching financial statements.• Weak efficiency : means that price of the security reflect the past price and trading history of the securities.
. • Meaning that neither fundamental nor technical analysis can be used to achieve superior gains.• Semi-strong efficiency : means that the price of the security reflects all public information which includes but is not limited to historical price and trading patterns.
• Strong efficiency : exists in a market where the price of security reflects all information whether or not it is publicly available. • Not even insider information could give an investor the advantage. .
TRANSACTION COSTS • Transaction costs consist of commissions. fees. . execution costs and opportunity costs. • Commissios are the fees paid to brokers to trade securities.
. • Custodial fees are fees charged by an instution that hold securities in safekeeping for an investor.• Fees are seperated two group custodial fees and transfer fees.
.EXECUTION COSTS • Execution costs represent the difference between the execution price of a security and the price that would have existed in the absence of the trade.
This component of costs represents the difference in performance between an investor’s desired investment and the same investor’s actual investment after adjusting for execution costs.OPPORTUNITY COSTS • The cost of not transacting represents an opportunity cost.commissions and fees. It may arise when a desired trade fails to be executed. .
PREPARED BY • • • • HATUN AYDAN HİLAL DURMUŞ TUBA TEKİN ALİ ÖNER .
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