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,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,INVESTMENTS,|,BODIE,KANE,MARCUS,3-,*,CHAPTER 3,How Securities are Traded,How Firms Issue Securities,Primary Market,Firms issue new securities through underwriter to public,Investors get new securities;firm gets funding,Secondary Market,Investors trade previously issued securities among themselves,2,How Firms Issue Securities(Ctd.),Stocks,IPO,Seasoned offering,Bonds,Public offering,Private placement,3,Investment Banking,Underwriting:Investment bank helps the firm to issue and market new securities,Prospectus:,Describes the issue and the prospects of the company.,Red herring,4,Figure 3.1 Relationship Among a Firm Issuing Securities,the Underwriters,and the Public,5,Investment Banking,Firm commitment,investment bank purchases securities from the issuing company and then resells them to the public.,Shelf Registration,SEC Rule 415:Allows firms to register securities and gradually sell them to the public for two years,6,Investment Banking(Ctd.),Private placements,Firm uses underwriter to sell securities to a small group of institutional or wealthy investors.,Cheaper than public offerings,Private placements not traded in secondary markets,7,Initial Public Offerings,Process,Road shows,to publicize new offering,Bookbuilding,to determine demand for the new issue,Degree of investor interest in the new offering provides valuable pricing information,8,Figure 3.3 Long-term Relative Performance of Initial Public Offerings,9,How Securities are Traded,Types of Markets:,Direct search,Buyers and sellers seek each other,Brokered markets,Brokers search out buyers and sellers,10,How Securities are Traded,Types of Markets:,Dealer markets,Dealers have inventories of assets from which they buy and sell,Auction markets,traders converge at one place to trade,11,Bid and Asked Prices,Bid Price,Bids are offers to buy.,In dealer markets,the bid price is the price at which the dealer is willing to buy.,Investors“sell to the bid”.,Bid-Asked spread is the profit for making a market in a security.,Ask Price,Asked prices represent offers to sell.,In dealer markets,the asked price is the price at which the dealer is willing to sell.,Investors must pay the asked price to buy the security.,12,Types of Orders,Market Order:Executed immediately,Trader receives current market price,Price-contingent Order:,Traders specify buying or selling price,A large order may be filled at multiple prices,13,Figure 3.5 Price-Contingent Orders,14,Trading Mechanisms,Dealer markets,Electronic communication networks(ECNs),True trading systems that can automatically execute orders,Specialists markets,maintain a“fair and orderly market”,15,NASDAQ,Lists about 3,200 firms,Originally,NASDAQ was primarily a dealer market with a price quotation system,Today,NASDAQs Market Center offers a sophisticated electronic trading platform with automatic trade execution.,Large orders may still be negotiated through brokers and dealers,16,Table 3.1 Partial Requirements for Listing on NASDAQ Markets,17,New York Stock Exchange,Lists about 2,800 firms,Automatic electronic trading runs side-by-side with traditional broker/specialist system,SuperDot:electronic order-routing system,DirectPlus:fully automated execution for small orders,Specialists:Handle large orders and maintain orderly trading,18,Table 3.2 Some Initial Listing Requirements for the NYSE,19,Electronic Communication Networks,ECNs:Private computer networks that directly link buyers with sellers for automated order execution,Major ECNs include,NASDAQs Market Center,ArcaEx,Direct Edge,BATS,and LavaFlow.,“Flash Trading”:Computer programs look for even the smallest mispricing opportunity and execute trades in tiny fractions of a second.,20,Bond Trading,Most bond trading takes place in the OTC market among bond dealers.,Market for many bond issues is“thin”.,NYSE is expanding its bond-trading system.,NYSE Bonds is the largest centralized bond market of any U.S.exchange,21,Market Structure in Other Countries,London-predominately electronic trading,Euronext market formed by combination of the Paris,Amsterdam and Brussels exchanges,then merged with NYSE,Tokyo Stock Exchange,22,Globalization and Consolidation of Stock Markets,NYSE mergers and acquisitions:,Archipelago(ECN),American Stock Exchange,Euronext,NASDAQ mergers and acquisitions:,Instinet/INET(ECN),Boston Stock Exchange,23,Globalization and Consolidation of Stock Markets,Chicago Mercantile Exchange acquired:,Chicago Board of Trade,New York Mercantile Exchange,24,Figure 3.6 Market Capitalization of Major World Stock Exchanges,2007,25,Trading Costs,Brokerage Commission,:fee paid to broker for making the transaction,Explicit cost of trading,Full Service vs.Discount brokerage,Spread,:Difference between the bid and asked prices,Implicit cost of trading,26,Buying on Margin,Borrowing part of the total purchase price of a position using a loan from a broker.,Investor contri
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