COMMON STOCK MARKETS IN THE UNITED STATES

1
Chapter 18

• COMMON STOCK MARKETS IN THE UNITED STATES

2
Characteristics of Common Stock

• Equity securities ownership share of a
  corporation.
• Common (junior) stockholders are the residual
  owners
• Right to income
• Right to assets
• Preferred (senior) stockholders have preference
  over common stockholders
• Right to fixed dividend

3
Trading Locations

• Stock Exchanges
• trading floors
• auction system / open-outcry
• central auction specialist system
• Over-The-Counter Market
• no trading floor
• negotiated system
• multiple market maker system
• Independent Electronic Trading Systems

4
(US) Stock Exchanges

• Major National Stock Exchanges
• NYSE or Big Board
• AMEX or ASE or Curb
• Regional Stock Exchanges
• Boston, Chicago, Cincinnati, San Francisco,
  Philadelphia

• OTC Market
• NASDAQ
• NASD
• Stocks can be dual-listed

5
Types of Markets

• First Market
• trading on exchanges of stocks listed on an
  exchange
• Second Market
• trade in OTC market of stocks not listed on
  exchange
• Third Market
• trading in OTC market of stocks listed on an
  exchange (deregulation helped neednt be member)
• Fourth Market
• private transactions between institutional
  investors
• e.g. B.S.E.

6
Exchanges (1st mkt)

• Formal organizations approved and regulated by
  the SEC
• Members
• can only trade listed stocks
• must buy a seat on the exchange (member)
• Listing requirements (initial, continued)
• minimum capitalization, shareholder equity,
  average closing share price, etc.

7
NYSE

• Centralized continuous auction
• Exchange participants
• single specialist/stock (market maker)
• (commission) brokers
• indie floor brokers (spill over)
• registered traders

• SuperDot
• Major roles of NYSE-specialist
• Auctioneer buy/sell on own account at stated
  price
• Agent / broker
• Dealer (own account)
• Catalyst focal point
• Commissions deregd

8
OTC Market (2nd, 3rd)

• Trading unlisted stocks
• But listing requirements
• NASDAQ stock market (virtual, 5k)
• NASDAQ market tiers
• NASDAQ National Market
• Small Cap Market can graduate to NNM

• NASDAQ market makers
• Other OTC markets (80k)
• OTC Bulletin Board
• Pink Sheets

9
Fourth Market

• Direct trading of stocks between two customers
  (no intermediary)
• Commissions avoided
• Alternative trading systems (ATS)
• electronic communications networks (30 of NASDAQ
  volume no brokers)
• crossing networks (aggregate orders across
  institutions by computer)

10
Trading Mechanisms

• Types of Orders
• market order
• limit order
• Automatic thresholds
• Short Selling
• Borrow stocks, not their price
• Margin Transactions
• Buy on margin use shares as collateral
• initial margin
• maintenance margin

• Transactions Costs
• (time trade to minimise these)
• explicit costs
• Fees, taxes
• implicit costs
• Impact changes p
• Timing if slow trade
• Opportunity if trade cancelled

11
Trading Arrangements for Institutional Investors

• Block Trading
• Trades of 10,000 shares or more of a given stock
  or trades with a market value of 200,000 or
  more.
• NYSE 1961 3 now gt 50
• Upstairs market broker may avoid exchange, OTC
• Program Trading
• Simultaneous computer-assisted buy/sale shares in
  a large number of different stocks for
• Rebalance portfolio (asset allocation)
• Index arbitrage (e.g. all SP500 firms)

12
Stock Market Indicators

• Dow Jones Industrial Average (30 largest NYSE
  blue chip)
• NYSE Composite (all NYSE)
• NASDAQ Composite (all NASDAQ OTC)
• SP 500 (500 NYSE listed OTC)
• AMEX
• Value Line Composite Average

13
Pricing Efficiency of the Stock Market

• Forms of Efficiency
• Weak form cant predict from market history
• Semistrong form from public info
• Strong form from private info
• but insider traders often earn abnormal returns
• Implications for Investing in Common Stock
• Active strategies try to outperform market
• Passive strategies buy market at min. cost

14
Stock Market Indexes

• Japan
• Tokyo Stock Price Index (TOPIX)
• Nikkei 225 Stock Average
• United Kingdom
• Financial Times-Stock Exchange 100 (FTSE 100)

• Germany
• Deutscher Aktienindex (DAX)
• France
• CAC 40
• Others
• Hang Seng Index
• Morgan Stanley EAFE Index