CH 4

Chapter 4
Investment Analysis and

Portfolio Management
Frank K. Reilly & Keith C. Brown
Part 1: BACKGROUND
2
1
Alokasi Aset
Seting
Investasi
RETURN 3
Investasi
RISIKO
PASAR MODAL
5
Indeks 4
Pasar
2
FE UNS Chp 4 Bandi, 2010
Chapter 4
Organization and Functioning of Securities
Markets
Questions to be answered:
1. What is the purpose and function of a market?
2. What are the characteristics that determine the quality of a market?
3. What is the difference between a primary and secondary capital market and
how do these markets support each other?
4. What are the national exchanges and how are the major security markets
becoming linked (what is meant by “passing the book”)?
5. What are the regional stock exchanges and the over-the-counter (OTC)
market?
6. What are the alternative market-making arrangements available on the
exchanges and the OCT market?
3
7. What are the major types of orders available to investors
and market makers?
8. What are the major functions of a specialist on the
NYSE and how does the specialist differ from the
central market maker on other exchanges?
9. What are the major factors that have caused the
significant changes in markets around the world in the
past 10 to 15 years?
10. What are some of the major changes in world capital
markets expected over the next decade?
4
What is a market?
• Membawa pembeli & penjual bersama unt

membantu dlm transfer baran dan jasa
• Tidak mesti butuh lokasi scr phisik
• Kedua pembeli & penjual memperoleh manfaat
dari pasar
5
Characteristics of a Good Market
• Ketersediaan informasi transaksi yang telah terjadi (past)
– Hrs tepat waktu dan akurat
• Likuiditas
– marketability
– Kontinyuitas harga
– depth
• Biaya transaksi rendah
• Penyesuaian harga yg cepat atas informasi baru (efisien)
6
Organization of the Securities Market
• Pasar Perdana (Primary markets)

– Pasar tempat sekuritas baru dijual & dana
mengalir (langsung) pd persh penerbit
• Pasar Skunder (Secondary markets)
– Pasar tempat investor jual-beli sekuritas yg
beredar (bukan IPO). Persh penerbit sekuritas
tdk lagi menerima dana dr transaksi di pasar
skunder
7
Government Bond Issues
1. Treasury Bills – negotiable, non-interest bearing

securities with original maturities of one year or less
2. Treasury Notes – original maturities of 2 to 10 years
3. Treasury Bonds – original maturities of more than 10
years
8
Municipal Bond Issues
• Sold by three methods
– Competitive bid
– Negotiation
– Private placement
• Underwriters sell the bonds to investors
– Origination
– Risk-bearing
– Distribution
9
The Underwriting Function
• The investment banker purchases the entire
issue from the issuer and resells the security
to the investing public.
• The firm charges a commission for
providing this service.
• For municipal bonds, the underwriting
function is performed by both investment
banking firms and commercial banks
10
Corporate Bond and Stock Issues
New issues are divided into two groups

1. Seasoned new issues - new shares offered
by firms that already have stock
outstanding
2. Initial public offerings (IPOs) - a firm
selling its common stock to the public for
the first time
11
Underwriting Relationships with
Investment Bankers
1. Negotiated
– Most common
– Full services of underwriter
2. Competitive bids
– Corporation specifies securities offered
– Lower costs
– Reduced services of underwriter
3. Best-efforts
– Investment banker acts as broker
12
Introduction of Rule 415
• Allows firms to register securities and sell
them piecemeal over the next two years
• Referred to as shelf registrations
• Great flexibility
• Reduces registration fees and expenses
• Allows requesting competitive bids from
several investment banking firms
• Mostly used for bond sales
13
Private Placements and Rule 144A
• Firms sells to a small group of

institutional investors without
extensive registration
• Lower issuing costs than public
offering
14
Why Secondary Financial Markets
Are Important
• Provides liquidity to investors who acquire

securities in the primary market
• Results in lower required returns than if
issuers had to compensate for lower
liquidity
• Helps determine market pricing for new
issues
15
Secondary Bond Market
• Secondary market for U.S. government and

municipal bonds
– U.S. government bonds traded by bond dealers
– Banks and investment firms make up municipal
market makers
• Secondary corporate bond market
– Traded through an OTC market
16
Financial Futures
Bond futures are traded in

• Chicago Board of Trade (CBOT)
• Chicago Mercantile Exchange (CME)
17
Secondary Equity Markets
1. Major national stock exchanges
– New York, American, Tokyo, and London
stock exchanges
2. Regional stock exchanges
– Chicago, San Francisco, Boston, Osaka,
Nagoya, Dublin, Cincinnati
3. Over-the-counter (OTC) market
– Stocks not listed on organized exchange
18
Trading Systems
• Pure auction market
– Buyers and sellers are matched by a broker at a
central location
– Price-driven market
• Dealer market
– Dealers provide liquidity by buying and selling
shares
– Dealers may compete against other dealers
19
Call Versus Continuous Markets
• Call markets trade individual stocks at

specified times to gather all orders and
determine a single price to satisfy the most
orders
• Used for opening prices on NYSE if orders
build up overnight or after trading is
suspended
• In a continuous market, trades occur at any
time the market is open
20
National Stock Exchanges
• Large number of listed securities

• Prestige of firms listed
• Wide geographic dispersion of listed
firms
• Diverse clientele of buyers and sellers
21
New York Stock Exchange
(NYSE)
• Largest organized securities market in
United States
• Established in 1817, but dates back to the
1792 Buttonwood Agreement by 24 brokers
• Over 3,000 companies with securities listed
• Total market value over $13 trillion
22
American Stock Exchange
(AMEX)
• Started by a group who traded unlisted stocks at
the corner of Wall and Hanover Streets in New
York as the Outdoor Curb Market
• Emphasis on foreign securities
• Doesn’t trade stocks listed on NYSE
• Merged with the NASDAQ IN 1998 although they
continued to operate as separate markets
• Warrants traded on AMEX years before NYSE
listed any 23
Tokyo Stock Exchange (TSE)
• Largest of the eight exchanges in Japan

• Dominates the Japanese market
• Established in 1878 and reorganized in 1943, 1947, and
1949
• Price-drive system
• Domestic and foreign stocks listed
• Approximately 1700 stocks listed with a total market value
of $2.4 trillion
• Most active 150 stocks are traded on floor, others by
computer
24
London Stock Exchange (LSE)
• Largest securities market in the United Kingdom

• Trades listed and unlisted securities
– More than 2,600 companies listed
• Largest listing of foreign stocks on any exchange
• Total market value of more than $561billion
• Pricing system by competing dealers via
computers similar to NASDAQ system in U.S.
25
Trends
• New exchanges in emerging economies
such as Russia, Poland, China, Hungary,
Peru, Sri Lanka
• Consolidation of existing exchanges in
developed countries
• Global twenty-four-hour market – made
possible by advances in technology
26
Recent Consolidations
• In 1995, Germany’s three largest exchanges merged into the one

in Frankfurt
• NASD merged with AMEX
• Philadelphia Stock Exchange merged with NASD/AMEX
• CBOE merged with Pacific Exchange
• The Amsterdam, Brussels and Paris exchanges formed an
alliance
• The Stockholm, Copenhagen, and Oslo exchanges formed an
alliance called the Nordic Country Alliance
27
The Global Twenty-four Hour Market
• Investment firms “pass the book” around the world to
maintain nearly continuous trading by utilizing markets
at Tokyo, London, and New York
THE TRADING DAY
Local Time EST
TSE 09:00 - 11:00 23:00 - 01:00
13:00 - 15:00 03:00 - 05:00
LSE 08:15 - 16:15 02:15 - 10:15
NYSE 09:30 - 16:00 09:30 - 16:00
28
Regional Exchanges
• Stocks not listed on a formal exchange

– Listing requirements vary
• Listed stocks
– Allow brokers that are not members of a
national exchange access to securities
• Regional Exchanges in United States
– Chicago, Boston, Cincinnati, Pacific,
Philadelphia
29
Over-the-Counter (OTC) Market
• Not a formal organization

• Largest segment of the U.S. secondary market
• Unlisted stocks and listed stocks (third market)
• Lenient requirements for listing on OTC
• 5,000 issues actively traded on NASDAQ NMS (National
Association of Securities Dealers Automated
Quotations National Market System)
• 1,000 issues on NASDAQ apart from NMS
• 1,000 issues not on NASDAQ
30
Operation of the OTC
• Any stock may be traded as long as

it has a willing market maker to act
a dealer
• OTC is a negotiated market
31
The NASDAQ System
• Automated electronic quotation system
• Dealers may elect to make markets in stocks
• All dealer quotes are available immediately
• Three levels of quotations provided
– Level 1 provides a single median representative
quote for the stocks on NASDAQ
– Level 2 shows quotes by all market makers
– Level 3 is for OTC market makers to change
their quotes shown 32
Listing Requirements for
NASDAQ
• Two lists
– National Market System (NMS)
– Regular NASDAQ
• Four sets of requirements
– Initial listing - least stringent
– Automatic NMS inclusion - up to the minute
• Alternative 1 for profitable companies with
limited assets
• Alternative 2 for large but less profitable
33
Third Market
• OTC trading of shares listed on an

exchange
• Mostly well known stocks
– GM, IBM, AT&T, Xerox
• Competes with trades on exchange
• May be open when exchange is closed
or trading suspended
34
Fourth Market
• Direct trading of securities between two
parties with no broker intermediary
• Usually both parties are institutions
• Can save transaction costs
• No data are available regarding its specific
size and growth
35
Detailed Analysis of
Exchange Markets
• Exchange Membership
• Major Types of Orders
• Exchange Market Makers
36
Exchange Membership
• Specialist
• Commission brokers
– Employees of a member firm who buy or sell
for the customers of the firm
• Floor brokers
– Independent members of an exchange who act
as broker for other members
• Registered traders
– Use their membership to buy and sell for their
own accounts
37
Major Types of Orders
• Market orders
– Buy or sell at the best current price
– Provides immediate liquidity
• Limit orders
– Order specifies the buy or sell price
– Time specifications for order may vary
• Instantaneous - “fill or kill”, part of a day, a full
day, several days, a week, a month, or good until
canceled (GTC)
38
• Short sales
– Sell overpriced stock that you don’t own and
purchase it back later (at a lower price)
– Borrow the stock from another investor
(through your broker)
– Can only be made on an uptick trade
– Must pay any dividends to lender
– Margin requirements apply
39
• Special Orders
– Stop loss
• Conditional order to sell stock if it drops to a given
price
• Does not guarantee price you will get upon sale
• Market disruptions can cancel such orders
– Stop buy order
• Investor who sold short may want to limit loss if
stock increases in price
40
Margin Transactions
• On any type order, instead of paying 100%
cash, borrow a portion of the transaction,
using the stock as collateral
• Interest rate on margin credit may be below
prime rate
• Regulations limit proportion borrowed
– Margin requirements are from 50% up
• Changes in price affect investor’s equity
41
Margin Transactions
Buy 200 shares at $50 = $10,000 position
Borrow 50%, investment of $5,000
If price increases to $60, position
– Value is $12,000
– Less - $5,000 borrowed
– Leaves $7,000 equity for a
– $7,000/$12,000 = 58% equity position
42
Margin Transactions
Buy 200 shares at $50 = $10,000 position
Borrow 50%, investment of $5,000
If price decreases to $40, position
– Value is $8,000
– Less - $5,000 borrowed
– Leaves $3,000 equity for a
– $3,000/$8,000 = 37.5% equity position
43
Margin Transactions
• Initial margin requirement at least 50%. Set up by

the Fed.
• Maintenance margin
– Requirement proportion of equity to stock
– Protects broker if stock price declines
– Minimum requirement is 25%
– Margin call on undermargined account to meet margin
requirement
– If margin call not met, stock will be sold to pay off the
loan
44
Exchange Market Makers
U.S. Markets
• Specialist is exchange member assigned to
handle particular stocks
– Has two roles:
– Broker to match buyers and sellers
– Dealer to maintain fair and orderly market
• Specialist has two income sources
– Broker commission, without risk
– Dealer trading income from profit, with risk
45
Exchange Market Makers
• Regular members
– Several employees allowed on trading floor
– Trading clerks for customers accounts
– Buy and sell for own accounts
• Saitori member
– Hundreds of employees on trading floor
– Intermediary clerks
– Brokers among members
– Maintain limit orders 46
TSE Membership
• Membership requires corporate license
• Four types of license are available and may
be combined
– 1. Trade securities as a dealer
– 2. Trade as a broker
– 3. Underwrite new securities on secondary
offerings
– 4. Handle retail distribution of securities
• Capital requirements vary by license
47
London Stock Exchange
• Brokers trade on behalf of their
customers
• Jobbers buy and sell as principals
• Membership based on experience and
competence
• Membership fee 1% of gross revenues
48
Changes in the Securities Markets
• Since 1965, the growth of trading by large

financial institutions has had many effects
– Negotiated (competitive) commission rates
– Influence on block trades
– Impact on stock price volatility
– Development of National Market System
(NMS)
49
Negotiated Commission Rates
• NYSE minimum commission schedule

prohibited price cutting since 1792
• No price break for large orders
– Initial reaction was “give-ups” paid to a
designated firm - soft dollars paid for market
research
– Third market competed with flexible
commissions and grew
– Fostered development of the fourth market
50
Negotiated Commission Rates
• In 1970 SEC began phasing in negotiated

commissions
– Commission rates have fallen
– Discount brokerage firms compete openly
– Many brokerage and research firms have
merged or liquidated
51
The Impact of Block Trades
• Number and size of block trades has

increased
• This strains the exchange specialist system
– Capital - 10,000 share or larger blocks
– Commitment - large risk with large blocks
– Contacts - Rule 113 prohibited direct contact to
offer blocks to another institution
52
The Impact of Block Trades
• Block houses are investment firms that help

institutions locate other institutions interested in
buying or selling blocks of stock
• A good block house has
1. The capital required to position a large block
2. The willingness to commit this capital to a block
transaction, and
3. Contacts among institutions
53
Institutions and Stock Price
Volatility
• Empirical studies have not supported the
theory that institutional trading increases
price volatility
• Where trading is dominated by institutions,
actively involved institutions may provide
liquidity for one another and
noninstitutional investors
54
National Market Systems (NMS)
• NMS has been advocated by financial
institutions to provide greater efficiency,
competition, and lower cost of transactions
• NMS is expected to have:
– 1. Centralized reporting of all transactions
– 2. Centralized quotation system
– 3. Centralized limit order book (CLOB)
– 4. Competition among all qualified market
makers 55
1. Centralized Reporting
• Should record all transactions of a stock,

regardless of location
• NYSE started a central tape in June 1975
covering all NYSE stocks traded on other
exchanges and OTC
56
2. Centralized Quotation System
• List quotes for a stock from all market

makers on the national exchanges, regional
exchanges, and OTC
• Brokers would complete trades on the
market with the best quote
• Intermarket Trading System (ITS) developed
by American, Boston, Chicago, New York,
Pacific, and Philadelphia Stock Exchanges
and NASD
57
3. Centralized Limit Order Book
• Should contain all limit orders from all
markets
• Should be visible to all traders
• All market makers and traders could fill
orders on it
• Technology exists, but NYSE specialists fill
most limit orders and oppose CLOB
because they do not want to share this
lucrative business
58
4. Competition Among All Qualified
Market Makers (Rule 390)
• Market makers compete on OTC market

• Competition reduces bid-ask spread
• NYSE opposes competition and argues that central
auction results in best market and execution
• NYSE Rule 390 requires members to obtain permission
of the exchange before trading a listed stock off the
exchange, forcing transactions to the exchange to
create a central market
59
New Trading Systems
• Daily trading volume has increased from 5

million shares to over a billion shares
• NYSE routinely handles days with volume
over a billion shares
• Technology has allowed the market process
to keep pace
60
Super DOT
• Electronic order-routing system

• Member firms transmit market and limit
orders in NYSE securities to trading posts
or member firm’s booth
• Report of execution returned electronically
• 85% of NYSE market orders enter through
Super DOT system
61
Display Book
• Electronic workstation that keeps

track of all limit orders and
incoming market orders, including
incoming Super Dot limit orders
62
Opening Automated Report
Service (OARS)
• Pre-opening market orders for Super Dot system

• OARS automatically and continuously pairs buy
and sell orders
• Presents imbalance to the specialist prior to the
opening of a stock
• Helps determine opening price and potential need
for preopening call market
63
Market Order Processing
• Super Dot’s postopening market order

system is designed to accept member firms’
postopening market orders up to 3 million
shares
• Rapid execution and reporting of market
orders
• In 2000, orders executed and reported in 15-
16 seconds on average
64
Limit Order Processing
• Electronically files orders to be executed

when and if a specific price is reached
• Updates the Specialist’s Display Book
• Good-until-cancelled orders that are not
executed are stored until executed or
cancelled
65
Global Market Changes
• NYSE Off-hours trading

– Crossing Session I provides for trading stocks
at NYSE closing prices after the regular session
from 4:15 PM to 5:00 PM
– Crossing Session II provides for trading a
collection of at least 15 NYSE stocks with a
market value of at least $1 million from 4:00
PM to 5:15 PM
66
Global Market Changes
• Listing foreign stocks on the NYSE

– Future growth will be in foreign countries
and hence listing foreign stocks is a
priority for the NYSE
– Problem: Foreign accounting standards
are less stringent than SEC requirements
for NYSE listing
67
London Stock Exchange
October 27, 1986 Big Bang
Brokers can act as market makers
Jobbers can deal with the public and
institutions
Commissions are negotiable
Gilt market was restructured like U.S.
government securities market
Trades reported on Stock Exchange
Automated Quotations (SEAQ)
68
Effects of the Big Bang
• Competitive market makers & SEAQ
reduced number of people on the
trading floor
• More activity in the system, but profit
margin has reduced from competition
• Many firms have merged or been
acquired by foreign firms
69
• 1998 brought TSE its own Big Bang

introducing more competition in
trading commissions and competition
among market participants
70
Paris Bourse
• The big brokerage house monopoly on

stock trading has been opened up to French
and foreign banks
• Investment firms are merging with banks to
acquire capital needed to trade in world
market
• Continuous auction market introduced to
replace call market
71
Future Developments
• Continuing consolidation of security

exchanges
• More specialized investment companies
• Changes in the financial services industry
– Financial supermarkets
– Financial boutiques
• Advances in technology
– Computerized trading
– 24-hour market of the future may be floorless,
global, and highly automated
72
The Internet
Investments Online
www.quote.com
www.sec.gov
www.nyse.com
www.nasdaq-amex.com
www.etrade.com
www.schwab.com
www.ml.com
73
Future topics
Chapter 5
• Uses of security-market indexes

• Stock market indicator series
• Bond market indicator series
74
PASAR MODAL INDONESIA
• Pasar Modal ditangani secara profesional
– Pelaksana: Bursa Efek Indonesia
– Pengawas: Badan Pengawas Pasar Modal (Bapepam)
– Anggota: Perusahaan Publik, Pemodal, Persh efek, Penasehat
investasi
– Penunjang: Biro Adm Efek, Wali Amanat, Pemeringkat Efek
• Posisi Pasar modal dlm pembg nasional adl
STRATEGISdiatur:
– UUUU No. 8/1995
– PPsetidaknya ada 3:
• PP No. 12/2004
• PP No. 46/1995
• PP No. 45/1995
Bandi, 2009
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FE UNS Chp
754 Bandi, 2010
Initial Public Offering – IPO
• Penawaran Perdana (IPO):
– Penjualan pertama saham oleh persh pribadi kepada publik.
– Sering diterbitkan oleh persh yg lbh kecil, lbh muda yg
mencari modal unt perluasan,
– Dpt juga dilakukan oleh persh besar yg dimiliki pribadi ingin
diperdagangkan scr publik.
– Dlm IPO, penerbit dibantu perusahaan penjamin (underwriting
firm), unt menentukan tipe sekuritas apa yg diterbitkan (biasa
dan/atau preferen), harga penawaran terbaik dan waktu unt
membawa ke pasar.
– Disebut sbg “penawaran publik”, unseasoned new issue (jk
sebelumnya tlh diterbitkan).
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IPO dpt menjadi investasi berisiko
– Bg investor individual, terlalu sulit memprediksi apa
yg akan terjadi atas saham pd hari pertama
perdagangan dan dlm waktu dekat setelahnya selama
data historis persh hanya sedikit unt dianalisis
– Umumnya IPO adl dari persh sdg bertumbuh scr
transitori, sehingga tergantung dari ketidakpastian
tambahan berkenaan nilai mendatang mereka
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Prosesnya, meliputi:
• Pengumuman dan Pendistribusian Prospektus
• Masa Penawaran
• Masa Penjatahan
• Masa Pengembalian Dana:
• Penyerahan Efek:
• Pencatatan Efek di Bursa, secara resmi dapat diperdagangkan di
pasar sekunder
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Proses:
• Pengumuman dan Pendistribusian Prospektus
– Diumumkan melalui surat kabar oleh emiten (secara
ringkas)
– Menyebarkan melalui penjamin atau agen (lengkap)
– Proses selanjutnya
• Masa Penawaran
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Proses:
Masa Penawaran
– Minimum 3 hari kerja
– Tenggang antara pemberian ijin emisi dan saat penawaran ditetapkan
maksimum 90 hari
– Pemodal memesan efek, dengan cara mengisi formulier pesanan disertai
tanda tangan pemodal dan dilampieri potokopi KTP 1 lembar
– Pemodal menyiapkan dan menyetorkan dana sesuai pesanan kepada agen
penjual atau penjamin emisi saat penyerahan formulir
– full/over subscribe= laku semua, biasanya jumlah yang diminta > jumlah
yang ditawarkan, penjamin emisi terbebas dari risiko untuk membeli
sisanya
– under subscribe = untuk sebaliknya, tidak laku semua, biasanya jumlah
yang diminta < jumlah yang ditawarkan, penjamin emisi membeli sisanya.
– Peran pialang: (1) agen pihak penjamin, (2) penasehat dan analis untuk
pemodal
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Proses:
• Masa Penjatahan
– Terjadi jika jumlah yang diminta pemodal > jumlah yang ditawarkan emiten
– Maksimum 12 hari kerja terhitung mujlai berakhirnya masa penawaran
• Masa Pengembalian Dana:
– Pengembalian dana kepada pemodal jika tidak terpenuhinya semua pesanan
– Dibayar kembali oleh penjamin emisi, atau agen penjual
– Batas waktu maksimum 4 hari terhitung mulai berakhirnya masa penjatahan
– Pengembalian tepat waktu akan mempercepat likuiditas pasar modal
• Penyerahan Efek:
– penjamin emisi menyerahkan kpd pemodal melalui agen penjual,
– maksimum waktu 12 hari kerja terhitung tanggal berakhirnya masa penjatahan,
– pengambilan harus dengan bukti pesanan
• Pencatatan Efek di Bursa, secara resmi dapat diperdagangkan di pasar sekunder
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Pasar Primer & Sekunder
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Proses IPO (Amerika)
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Chapter 4

Investment Analysis and

• Membawa pembeli & penjual bersama unt

• Pasar Perdana (Primary markets)

1. Treasury Bills – negotiable, non-interest bearing

New issues are divided into two groups

• Firms sells to a small group of

• Provides liquidity to investors who acquire

• Secondary market for U.S. government and

Bond futures are traded in

• Call markets trade individual stocks at

• Large number of listed securities

• Largest of the eight exchanges in Japan

• Largest securities market in the United Kingdom

• In 1995, Germany’s three largest exchanges merged into the one

• Stocks not listed on a formal exchange

• Not a formal organization

• Any stock may be traded as long as

• OTC is a negotiated market

• OTC trading of shares listed on an

• Major Types of Orders

• Exchange Market Makers

• Initial margin requirement at least 50%. Set up by

• Since 1965, the growth of trading by large

• NYSE minimum commission schedule

• In 1970 SEC began phasing in negotiated

• Number and size of block trades has

• Block houses are investment firms that help

• Should record all transactions of a stock,

• List quotes for a stock from all market

• Market makers compete on OTC market

• Daily trading volume has increased from 5

• Electronic order-routing system

• Electronic workstation that keeps

• Pre-opening market orders for Super Dot system

• Super Dot’s postopening market order

• Electronically files orders to be executed

• NYSE Off-hours trading

• Listing foreign stocks on the NYSE

• 1998 brought TSE its own Big Bang

• The big brokerage house monopoly on

• Continuing consolidation of security

• Uses of security-market indexes

9/30/2010 Bandi, 2009

9/30/2010 Bandi, 2009

9/30/2010 Bandi, 2009

9/30/2010 Bandi, 2009

9/30/2010 Bandi, 2009

9/30/2010 Bandi, 2009

9/30/2010 Bandi, 2009

9/30/2010 Bandi, 2009

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