Securities Markets

Securities Securities MarketsMarkets

The Importance of The Importance of Financial Markets Financial Markets

The financial markets permit both The financial markets permit both business and government to raise business and government to raise the needed funds by selling the needed funds by selling securities.securities.

Simultaneously, investor with excess Simultaneously, investor with excess funds are able to invest and earn a funds are able to invest and earn a return, enhancing their welfare. return, enhancing their welfare.

The Primary MarketsThe Primary Markets

A primary market is a one in which a A primary market is a one in which a borrower issues new securities in exchange borrower issues new securities in exchange for cash from the investor (buyer).for cash from the investor (buyer).

New sales of stocks or bonds all take place New sales of stocks or bonds all take place in the primary markets.in the primary markets.

Initial public offerings (IPOs): Common stock Initial public offerings (IPOs): Common stock shares of a company being sold for the first shares of a company being sold for the first time.time.

Once the original purchaser sell the Once the original purchaser sell the securities, they trade in secondary markets. securities, they trade in secondary markets.

The Investment BankerThe Investment Banker The investment banker is the middleman The investment banker is the middleman

between a company issuing new securities between a company issuing new securities and the public. and the public.

The issuer sells its securities to investment The issuer sells its securities to investment bankers, who in turn sell the securities to bankers, who in turn sell the securities to investors. (Underwriting)investors. (Underwriting)

The investment bankers can provide The investment bankers can provide important advice to their clients during the important advice to their clients during the planning stage preceding the issuance of planning stage preceding the issuance of new securities.new securities.

Investment bankers buy the securities from Investment bankers buy the securities from the issuer at a discount. The bankers own the issuer at a discount. The bankers own the securities until they are sold.the securities until they are sold.

Investment BankerInvestment Banker

Investment bankers can form a syndicate Investment bankers can form a syndicate or group of investment bankers.or group of investment bankers.

A lead investment banker can act as a A lead investment banker can act as a global coordinator linking separate global coordinator linking separate underwriting syndicates worldwide.underwriting syndicates worldwide.

Private placement: whereby new Private placement: whereby new securities issues are sold directly to securities issues are sold directly to financial institutions, such as life financial institutions, such as life insurance companies and pension funds.insurance companies and pension funds.

The Secondary MarketsThe Secondary Markets

Markets where existing securities Markets where existing securities are traded among investors.are traded among investors.

Secondary markets are divided to:Secondary markets are divided to: Equity securities:Equity securities:

marketsmarkets Negotiated marketsNegotiated markets

Bonds markets.Bonds markets. Derivatives markets.Derivatives markets.

Equity Securities- Equity Securities- MarketsMarkets

Securities market where the price of Securities market where the price of securities are determined by actions securities are determined by actions of buyers and sellers. NYSE and of buyers and sellers. NYSE and ASE.ASE.

Broker: An intermediary who Broker: An intermediary who presents buyers and sellers in presents buyers and sellers in securities transactions and receives securities transactions and receives a commission.a commission.

Equity Securities- Equity Securities- MarketsMarkets

The NYSE has specific listing The NYSE has specific listing requirements that companies must meet requirements that companies must meet in order to be listed.in order to be listed.

The NYSE pays attention to degree of The NYSE pays attention to degree of national interest in the company, its national interest in the company, its relative position, stability in the industry relative position, stability in the industry and specific amount of earning power.and specific amount of earning power.

Block transactions: involve at least Block transactions: involve at least 10,000 shares.10,000 shares.

Equity Securities-Equity Securities-Negotiated MarketsNegotiated Markets

Over-the counter (OTC) market is a Over-the counter (OTC) market is a negotiated market consisting of a negotiated market consisting of a network of dealers who make a market network of dealers who make a market by standing ready to buy and sell by standing ready to buy and sell securities at specified prices.securities at specified prices.

This market handles unlisted securities.This market handles unlisted securities. Most of the actively traded OTC stocks Most of the actively traded OTC stocks

are part of the Nasdaq stock market are part of the Nasdaq stock market showing current bid-ask prices for showing current bid-ask prices for thousands of stocks. thousands of stocks.

Equity Securities-Equity Securities-Negotiated MarketsNegotiated Markets

Nasdaq stock market does not have Nasdaq stock market does not have a specific location. a specific location.

It consists of network of market It consists of network of market makers (A broker/dealer who is makers (A broker/dealer who is registered to trade in a given registered to trade in a given security on the Nasdaq) linked security on the Nasdaq) linked together by communications devices together by communications devices who compete freely with each other. who compete freely with each other.

Equity Securities-ECNsEquity Securities-ECNs

Electronic communications network Electronic communications network is a computerized trading network is a computerized trading network that matches buy and sell orders that matches buy and sell orders electronically entered by members electronically entered by members of the ECNs. (Small exchanges of the ECNs. (Small exchanges under SEC)under SEC)

If no match is currently possible, If no match is currently possible, ECN post the order on Nasdaq’s ECN post the order on Nasdaq’s trading screen. trading screen.

Stock Market IndicatorsStock Market Indicators

A market index measures the A market index measures the current price behavior of the sample current price behavior of the sample in relation to a base period.in relation to a base period.

There are many stock market There are many stock market indicators such as:indicators such as: The Dow-Jones Industrial Average.The Dow-Jones Industrial Average. Standard & Poor’s Stock Price indexes.Standard & Poor’s Stock Price indexes.


The Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA).(DJIA). It is a price weighted series of 30 It is a price weighted series of 30

leading industrial stocks (large, well-leading industrial stocks (large, well-established, and well-known established, and well-known companies).companies).

It is criticized for being price weighted It is criticized for being price weighted and using only 30 stocks.and using only 30 stocks.


Standard & Poor’s Stock Price indexes.Standard & Poor’s Stock Price indexes. Standard & Poor’s corporation publish Standard & Poor’s corporation publish

different market indices, one of which is different market indices, one of which is S&P 500 (which is market value index of S&P 500 (which is market value index of stock market activity covering 500 stocks.stock market activity covering 500 stocks.

It is expressed in relative numbers which is It is expressed in relative numbers which is a base period (1941-1943).a base period (1941-1943).

Unlike the DJIA, each stock’s importance is Unlike the DJIA, each stock’s importance is based on relative total market value based on relative total market value instead of relative per-share price. instead of relative per-share price.

Relationships between Relationships between Stock IndexesStock Indexes

The relationship between the price The relationship between the price changes for the three indexes (S&P, changes for the three indexes (S&P, NYSE, and DJIA) has been very high NYSE, and DJIA) has been very high (0.90).(0.90).

Major market indexes tend to show Major market indexes tend to show strong similarities.strong similarities.

Bonds MarketsBonds Markets

Investors can purchase either new bonds Investors can purchase either new bonds being issued in the primary market or being issued in the primary market or existing bonds outstanding in the secondary existing bonds outstanding in the secondary market.market.

NYSE has the largest bond market in the NYSE has the largest bond market in the world, with an automated bond system world, with an automated bond system (ABS).(ABS).

ABS is a fully automated trading system that ABS is a fully automated trading system that allows subscribing firms to directly enter and allows subscribing firms to directly enter and execute bond orders from their own execute bond orders from their own terminals. terminals.


The market for bonds at US is primarily The market for bonds at US is primarily OTC.OTC.

Investors can buy and sell bonds through Investors can buy and sell bonds through their brokers, who in turn trade with their brokers, who in turn trade with bond dealers.bond dealers.

Treasury bonds: Federal Reserve Treasury bonds: Federal Reserve conducts open-market operations with conducts open-market operations with Treasury securities where many large Treasury securities where many large banks act as dealers in particular issues. banks act as dealers in particular issues.


Agency bonds: Federal agency Agency bonds: Federal agency securities trade in good secondary securities trade in good secondary markets with market dealers and markets with market dealers and procedures used as in the case of procedures used as in the case of Treasury securities.Treasury securities.

Municipals bonds: Municipal securities Municipals bonds: Municipal securities often have a relatively thin market with often have a relatively thin market with moderate activity in the secondary moderate activity in the secondary market because most of these bonds are market because most of these bonds are held to maturity.held to maturity.


Corporate bonds: Most corporate Corporate bonds: Most corporate bonds are traded off the exchanges bonds are traded off the exchanges by institutions dealing in lots. A by institutions dealing in lots. A computer collects bids to buy and computer collects bids to buy and offers to sell from around the offers to sell from around the country and execute the trade when country and execute the trade when a match is made. a match is made.

Derivatives MarketsDerivatives Markets

Options trade on the floor of Options trade on the floor of exchanges, such as the Chicago exchanges, such as the Chicago Board Options Exchange, using a Board Options Exchange, using a system of market makers.system of market makers.

Options: A bid and asked price is Options: A bid and asked price is quoted by the market maker, and quoted by the market maker, and floor brokers can trade with the floor brokers can trade with the maker or with other brokers.maker or with other brokers.

Derivatives MarketsDerivatives Markets

Futures contracts are traded on Futures contracts are traded on exchanges in designated “pits” using exchanges in designated “pits” using as a trading mechanism an open-as a trading mechanism an open-outcry process.outcry process.

The pit trader offers to buy or sell The pit trader offers to buy or sell contracts at an offered price and contracts at an offered price and other traders are free to transact if other traders are free to transact if they wish.they wish.

Egyptian Stock Exchange Egyptian Stock Exchange IndexesIndexes

Market Capitalization (Mkt Cap) = Market Capitalization (Mkt Cap) = Last closing price x Number of listed sharesLast closing price x Number of listed shares

General Index:General Index: Includes all companies listed in the stock.Includes all companies listed in the stock. General Index = [Mkt CapGeneral Index = [Mkt Captt / Mkt Cap / Mkt Cap00]] x 100x 100

CASE 30 Index:CASE 30 Index: CASE 30 index includes the top 30 companies CASE 30 index includes the top 30 companies

in terms of liquidity and activity.in terms of liquidity and activity.

Egyptian Stock Exchange Egyptian Stock Exchange IndexesIndexes

CASE 30 Index = Mkt CapCASE 30 Index = Mkt Captt / Divisor. / Divisor. Divisor:Divisor:

Calculate the Mkt Cap of companies at Calculate the Mkt Cap of companies at starting date (t=0)starting date (t=0)

Set starting value of index (100)Set starting value of index (100) Index Divisor = Mkt CapIndex Divisor = Mkt Cap00 / Index Value / Index Value

(100)(100) Divisor = Adjusted Mkt Capt / Previous Divisor = Adjusted Mkt Capt / Previous

index levelindex level

CASE 30 and General Index of CASE 30 and General Index of Egypt from January 2002 to Egypt from January 2002 to

October 2003October 2003

400

600

800

1000

550

600

650

700

750

800

50 100 150 200 250 300 350 400

CASE30 INDEX

CA

SE

30

Gen

eral Index

Statistics for the Statistics for the Egyptian Stock Exchange Egyptian Stock Exchange

(September 2003)(September 2003) Value traded of listed securities vs. Value traded of listed securities vs.

OTCOTC Listed = 89%Listed = 89% OTC = 11%OTC = 11%

Trading by type of securities in Trading by type of securities in terms of valueterms of value Common Shares = 96%Common Shares = 96% Bonds = 4%Bonds = 4%

Statistics for the Statistics for the Egyptian Stock Exchange Egyptian Stock Exchange

(September 2003)(September 2003) Retail vs. institutional investors in Retail vs. institutional investors in

terms of value tradedterms of value traded Institutional = 37%Institutional = 37% Retail = 63%Retail = 63%

Foreigners vs. Egyptians in terms of Foreigners vs. Egyptians in terms of value tradedvalue traded Egyptians = 72%Egyptians = 72% Foreigners = 28%Foreigners = 28%

Clearing & Settlement Clearing & Settlement ProcessProcess

Trade

Post Trade

Client B

BuyingBroker

Client S

SellingBroker

StockExchange

Client S

Client B

Securities DepositoryBuyer + Seller -

CSD

Funds Settlements BankBuyer - Seller +

BuyingBroker

SellingBroker

DVP SettlementOn T+3

Documents

Securities Markets