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LECTURE 3 - COMMON STOCK MARKETS Secondary Markets Real financial markets differ from the perfect case because of broker commission, orderhandling and clearance charges, taxes (capital gains), information costs and trading restrictions. Brokers and dealers are needed to assist in the smooth running of the market. CHARACTERSTICS OF COMMON STOCK Equity securities = ownership share of a corporation. Common (junior) stockholders are the residual owners with right to income and assets. Preferred (senior) stockholders have preference over common stockholders; right to fixed dividend. Trading locations Stock exchanges have trading floor, an auction system (open outcry), and a central auction specialist system. In an over-the-counter market there is a negotiated system, multiple market maker system and no trading floor. There can also be independent electronic trading systems where individuals find buyers for their stock, or sellers to buy from. TYPES OF MARKETS
* FIRST MARKET - trading on exchanges of stocks listed on exchange. Formal organisations approved and regulated by the Securities Exchange Commission (SEC). Members must buy a seat on the exchange and can only trade listed stocks. There are listing requirements such as minimum capitalization, shareholder equity etc.
* SECOND MARKET - trade in OTC market of stocks not listed on exchange.
* THIRD MARKET - trading in OTC market of stocks listed on an exchange.
* FOURTH MARKET - private transactions between institutional investors. NEW YORK STOCK EXCHANGE (NYSE) Has a centralised continuous auction and SuperDot system. Exchange participants include single specialist (market makers), (commission) brokers, indie floor brokers (spill over) and registered traders. Major roles of NYSE-specialist; auctioneer (buy/sell on own account at stated price, agent/broker, dealer and catalyst (focal point). Trading Mechanisms The types of orders are market, limit, stop and market if touched order. Short selling occurs when people borrow stocks (for a low cost), sell them then buy them back and return them. Controversy as a profit is made is price falls. Margin transactions occur when people buy on margin: using shares as collateral. TRANSACTIONS COSTS Time trade is used to minimise these. Can be explicit (fees, taxes etc.) or implicit. Impact changes price, timing if trade is slow and opportunity costs if trade is not made. TRADING ARRANGEMENTS FOR INSTITUTIONAL INVESTORS Block trading
* Trades of 10,000+ shares of a given stock or trades with a market value of $200,000 or more
* NYSE: 1962 3%; now > 50%.
* Upstairs market: broker may avoid exchange, OTC. Program trading
* Simultaneous computer assisted buy/sale shares in a large number of different stocks for: o Reliance portfolio (asset allocation) o Index arbitrage. Stock Market Indicators
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