Market Transactions
trading platform to execute trades
Money Markets: the market where short-term securities
are bought and sold
Capital Market: the market where long-term securities
such as stocks and bonds are bought and sold
Primary Market: the market in which new issues of
securities are sold to the public
o Initial Public Offering (IPO)
– First public sale of a company’s stock
– Requires SEC approval
Going Public: The IPO Process
1. Underwriting the offering: promoting the
stock and facilitating the sale of the
company’s shares
2. Prospectus: registration statement
describing the issue and the issuer
3. Red Herring: preliminary prospectus
available during the waiting period
4. Quiet Period: time period after prospectus
is filed when company must restrict what is
said about the company
5. Road Show: series of presentations to
potential investors
The Investment Banker’s Role
 Underwriting the Issue: purchases the
security at agreedon price and bears the
risk of reselling it to the public
 Underwriting Syndicate: group formed by
investment banker to share the financial
risk of underwriting
 Selling Group: other brokerage firms that
help the underwriting syndicate sell issue to
the public
 Tombstone: public announcement of issue
and role of participants in underwriting
process
 Investment Banker Compensation: typically
in the form of a discount on the sale price of
the securities
o Three Choices to Market Securities in Primary
Market
– Public offering
– Rights offering
– Private Placement
Secondary Market: the market in which securities are
traded after they have been issued
 Role of Secondary Markets
– Provides liquidity to security purchasers
– Provides continuous pricing mechanism
 Securities Exchanges: forums where buyers and
sellers of securities are brought together to
execute trades
 Nasdaq Market: employs an all-electronic
 Over-the-counter (OTC) Market: involves trading
in smaller, unlisted securities
Broker Markets and Dealer Markets
o Broker Markets: consists of national and
regional securities exchanges
– 60% of the total dollar volume of all shares in
U.S. stock market trade here
– New York Stock Exchange (NYSE) is largest and
most well-known
– Trades are executed when a buyer and a seller
are brought together by a broker and the trade
takes place directly between the buyer and seller
 The New York Stock Exchange (NYSE)
– Largest stock exchange
—over 2,700 companies
– Over 350 billion shares of stock
traded in 2005
– Accounts for 90% of stocks traded on
exchanges
– Specialists make transactions in key
stocks
– Strictest listing policies
 The American Exchange (AMEX)
– About 700 companies and 4% of
stocks traded
– Major market for Exchange Traded
Funds
– Typically smaller and younger
companies who cannot meet stricter
listing requirements for NYSE
 Regional Stock Exchanges
– Typically lists between 100–500
companies, usually with local and
regional appeal
– Listing requirements are more
lenient than NYSE
– Often include stocks that are also
listed on NYSE or AMEX
– Best-known: Midwest, Pacific,
Philadelphia, Boston, and Cincinnati
 Options Exchanges
– Allows trading of options
– Best-known: Chicago Board Options
Exchange (CBOE)
 Futures Exchanges
– Allows trading of financial futures
– Best-known: Chicago Board of Trade
(CBT)
o Dealer Markets: consists of both the Nasdaq
market and the OTC market
– Trades are executed with a dealer (market
maker) in the middle. Sellers sell to a market
maker at a stated price. The market maker then
offers the securities to a buyer.
 No centralized trading floor; comprised of
market makers linked by
telecommunications network Both IPOs
and secondary distributions are sold on
OTC
– 40% of the total dollar volume of all
shares in U.S. stock market trade here
– Both IPOs and secondary distributions
are sold on OTC
 Bid Price: the highest price offered by
market maker to purchase a given
security
 Ask Price: the lowest price at which a
market maker is willing to sell a given
security

 Nasdaq
– Largest dealer market
– Lists large companies (Microsoft, Intel, Dell, eBay)
and smaller companies
 Over-the-counter (OTC) Bulletin Board
– Lists smaller companies that cannot or don’t wish
to be listed on Nasdaq
– Companies are regulated by SEC
 Over-the-counter (OTC) Pink Sheets
– Lists smaller companies that are not regulated by
SEC
– Liquidity is minimal or almost non-existent
– Very risky; many nearly worthless st
Risks of International Investing
– Foreign securities markets do not necessarily move with
the U.S. securities market
– Foreign securities markets tend to be more risky than
U.S. markets
 Indirect Ways to Invest in Foreign Securities
– Purchase shares of U.S.-based multinational with
substantial foreign operations
 Direct Ways to Invest in Foreign Securities
– Purchase securities on foreign stock exchanges
– Buy securities of foreign companies that trade on U.S.
stock exchanges
– Buy American Depositary Receipts (ADRs): dollar
denominated receipts for stocks of foreign companies held
in vaults of banks

 Usual Investment Risks Still Apply

 Government Policies Risks
– Unstable foreign governments
– Different laws in trade, labor or taxation
– Different economic and political conditions
– Less stringent regulation of foreign securities markets
 Currency Exchange Rate Risks
– Value of foreign currency fluctuates compared to U.S.
dollar
– Value of foreign investments can go up and down with
exchange rate fluctuations

Trading Hours of Securities Markets

 Regular Trading Session for U.S. Exchanges and Nasdaq

– 9:30 A.M. to 4:00 P.M. Eastern time
Alternative Trading Systems  Extended-Hours Electronic-Trading Sessions
– NYSE: 4:15 to 5:00 P.M. Eastern time
 Third Market – Nasdaq: 4:00 P.M. to 6:30 P.M. Eastern time
– Large institutional investors go through market makers – Orders only filled if matched with identical opposing
that are not members of a securities exchange orders
– Institutional investors (mutual funds, life insurance – 24-hour market probably in near future
companies, pension funds) receive reduced trading costs
due to large size of transactions Regulation of Securities Markets
 Fourth Market  Insider Trading
– Large institutional investors deal directly with each other – Use of nonpublic information about a company to make
to bypass market makers profitable securities transactions
– Electronic Communications Networks (ECNs) allow direct
 Blue Sky Laws
trading
– Laws imposed by individual states to regulate sellers of
– ECNs most effective for high-volume, actively traded
securities
securities
– Intended to prevent investors from being sold nothing
General Market Conditions but “blue sky”
 Securities Act of 1933
 Bull Market – Required full disclosure of information by companies
– Favorable markets  Securities Act of 1934
– Rising prices – Established SEC as government regulatory body
– Investor/consumer optimism  Maloney Act of 1938
– Economic growth and recovery – Allowed self-regulation of securities industry through
– Government stimulus trade associations such as the National Association of
 Bear Market Securities Dealers (NASD)
– Unfavorable markets  Investment Company Act of 1940
– Falling prices – Created & regulated mutual funds
– Investor/consumer pessimism  Investment Advisors Act of 1940
– Economic slowdown – Required investment advisers to make full disclosure
– Government restraint about their backgrounds and their investments, as well as
register with the SEC
Globalization of Securities Markets
 Securities Acts Amendments of 1975
 Diversification: the inclusion of a number of different – Abolished fixed-commissions and established an
investment vehicles in a portfolio to increase returns or electronic communications network to make stock pricing
reduce risks more competitive
 Use of International Securities Improves Diversification  Insider Trading and Fraud Act of 1988
– More industries and securities available – Prohibited insider trading on nonpublic information
– Securities denominated in different currencies  Sarbanes-Oxley Act of 2002
– Opportunities in rapidly expanding economies – Tightened accounting and audit guidelines to reduce
 International Investment Performance corporate fraud
– Opportunities for high returns
Basic Types of Securities Transactions

 Long Purchase
– Investor buys and holds securities
– “Buy low and sell high”
– Make money when prices go up
 Margin Trading
– Uses borrowed funds to purchase securities
– Currently owned securities used as collateral for margin
loan from broker
– Margin requirements set by Federal Reserve Board
o Determines the minimum amount of equity
required
o On $4,445 purchase with 50% margin
requirement, investor puts up $2,222.50 and
broker will lend remaining $2,222.50
– Can be used for common stocks, preferred stocks, bonds,
mutual funds, options, warrants and futures
 Advantages
– Allows use of financial leverage
– Magnifies profits
 Disadvantages
– Magnifies losses
– Interest expense on margin loan
– Margin calls
 Short Selling
– Investor sells securities they don’t own
– Investor borrows securities from broker
– Broker lends securities owned by other investors that are
held in “street name”
– “Sell high and buy low”
– Investors make money when stock prices go down
 Advantages
– Chance to profit when stock price declines
 Disadvantages
– Limited return opportunities: stock price cannot
go below $0.00
– Unlimited risks: stock price can go up an
unlimited amount
– If stock price goes up, short seller still needs to
buy shares to pay back the “borrowed” shares to
the broker
– Short sellers may not earn dividends