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Table of Contents

How Securities Are Traded

Primary versus Secondary

Private Placements

Investment Banking Arrangements

Where Securities Are Trades

Comparison of companies listed on Nasdaq,NYSE, & AMEX

OTC Market

Third Market

Trading on the Exchange

PPT Slide

Types of orders

Trading Securities

OTC versus Exchange Trading

More on Trading

Trading on Margin

More on Margin

Author: Susan D. Jordan

Email: sjordan@pop.uky.edu

Home Page: www.uky.edu/~sjordan/

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More on Margin

Short Sales

Short Sale: example

Short sale: oops!

Regulation of Security Markets

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Private Placements

Comparison of companies listed

OTC Market

Third Market

PPT Slide

Types of orders

Trading Securities

More on Trading

Trading on Margin

More on Margin

Short Sales

Short Sale: example

Short sale: oops!

Private Placements

Public offeringsregistered with the SEC and sale is made to the investing public

prospectus & red herring■

Shelf registration (Rule 415, since 1982)■

Initial Public Offerings (IPOs)

Evidence of underpricing■

Performance■

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Private Placements

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3 Basic ServicesAdvice❍

Distribution❍

Underwritten vs. “Best Efforts”

Underwritten: firm commitment on proceeds to the issuing firm■

Best Efforts: no firm commitment■

SelectionNegotiated❍

Competitive❍

Chapter 3 (BKM)

Finance 650

Fall 1998Lecture notes prepared by:

Dr. Susan D. Jordan

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PrimaryNew issue (IPO or seasoned new issue)❍

Key factor: issuer receives the proceeds from the sale❍

SecondaryExisting owner sells to another party❍

Issuing firm doesn’t receive proceeds and is not directly involved❍

Private Placements

Private placements: sale to a limited number ofsophisticated investors not requiring theprotection of registration

Dominated by institutions❍

Very active market for debt securities❍

Not active for stock offerings❍

Private Placements

Organized ExchangesNYSE, ASE (AMEX), Regional❍

Listing Requirements❍

Seat or membership❍

The Over-the-Counter Market (OTC)●

Third Market●

Fourth Market●

Comparison of companies listed onNasdaq, NYSE, & AMEX

Comparison of companies listed

OTC Market

Dealer market without centralized order flow●

NASDAQ: largest organized stock market forOTC trading; information system for individuals,brokers and dealers (3 levels)

Securities: stocks, bonds and some derivatives❍

Most secondary bonds transactions❍

OTC Market

Third Market

Third MarketTrading of listed securities away from the exchange❍

Institutional market: to facilitate trades of larger blocks of securities❍

Involves services of dealers and brokers❍

Fourth MarketInstitutions trading directly with institutions❍

No middleman involved in the transaction❍

Organized information and trading systems

INSTINET■

POSIT■

Third Market

Commission Broker●

Floor Broker●

Odd Lot Dealer●

Registered Trader●

Specialistbroker => limit & special orders❍

dealer => maintain fair & orderly market❍

book => electronic work station❍

PPT Slide

Types of orders

Market●

Limit●

Stoploss (sell)❍

buy❍

Stop Limit●

Other features (FK; GTC; Day order)●

Types of orders

Trading Securities

Block transaction●

Settlement3 business days since June '95 (T plus 3)❍

Clearing house & netting❍

Street name❍

SuperDot●

Program Trading●

Trading Securities

OTCdecentralized dealer market❍

trading through❍

Exchangecentralized auction market❍

price priority❍

price discovery❍

More on Trading

Trading costscommissions❍

dealer bid-asked spread❍

price concession❍

More on Trading

Trading on Margin

Borrow part of the purchase price from broker(call money rate)

Margin = equity/MV of securitiesequity = MV - Loan Balance❍

Initial margin●

Maintenance margin●

Margin call (If actual < maintenance)●

Restricted (Initial > Actual > Maintenance)●

Trading on Margin

Example:●

You have $9,000Initial margin is 50%; maintenance is 30%❍

You buy 1000 shares at $18Margin = ($18,000-9000)/$18,000 = 50%❍

Price falls to $12, you owe $9,000,Margin = (12000-9000)/12000 = 25%❍

Trading on Margin

More on Margin

Margin call occurs at what price?Equity/MV = 0.30❍

0.30 = (MV - $9,000)/MV❍

MV = Loan/(1-.30) = $9000/.7 = $12,857❍

P = $12857/1000 = $12.86❍

More on Margin

Gains and lossesInterest is 5%, you pay $450❍

Stock price up by 20%, price is $21.60($21,600 - $18,450)/$9,000 = 35%❍

Stock price down by 20%; price is $14.40($14,400 - $18,450)/$9,000 = -45%❍

More on Margin

Short Sales

The long and short of it●

The uptick rule and bear raids●

Hypothecation●

Use of the proceeds● ●

Margin requirements●

Dividends●

Potential losses●

"He that sells what is'n' his'n' . . ."●

Short Sales

Short Sale: example

Sell 1,000 IBM at $50●

Initial margin = 50%●

Maintenance margin = 40%●

Margin = 0.50 x $50,000 = $25,000●

Short Sale: example

Short sale: oops!

IBM rises to $60Equity = $15,000❍

Margin = $15,000/$60,000 = 20%❍

Critical price: Equity/(1000 x P) = 0.4

($75,000 - 1000 x P)/(1000 x P) = 0.4■

P = $53.57■

Short sale: oops!

Government Regulation●

Self-Regulation●

Circuit Breakers●

Insider Trading●

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How Securities Are Traded - janroman.dhis.orgjanroman.dhis.org/finance/Books Notes Thesises...

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