Equities Markets

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Chapter 3

• Equities Markets

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CHAPTER 3 OVERVIEW

• 3.1 Major U.S. Securities Exchanges
• 3.2 Over-the-Counter (OTC) Markets
• 3.3 Large-Company Stock Indexes
• 3.4 Medium-Size Company Stock Indexes
• 3.5 Small-Company Stock Indexes
• 3.6 Global Stock Indexes
• 3.7 Securities Market Regulation

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KEY TERMSMarkets

• NYSE
• agency auction
• specialist
• round lot
• NASD
• AMEX
• public float
• CBOE
• CBOT
• Nasdaq Stock Market

• negotiated market
• market makers
• customer order flow
• market maker spread
• inside market
• Nasdaq SmallCap Market
• penny stock
• OTCBB
• ADR (American Depositary Receipts)

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Major U.S. Securities Exchanges

• New York Stock Exchange--founded 1817
• Home to 3,025 companies
• As of 12/99, 280.9 billion shares listed and
  available for tradingworth 12.3 trillion
• Private partnership that provides agency auction
  marketbrokers represent buyers and sellers
  prices set by supply and demand
• Largest exchange in terms of market
  capitalization 3700 issues listed
• Specialists manage markets for individual stocks,
  providing liquidity to buyers and sellers
• LiquidityThe ease with which the securities can
  be bought or sold without wide price fluctuation
  assuming that no significant information has
  arrived since the previous trade.
• Trades 80 of total trading volume (One billion
  shares per day)

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NYSE Listing Requirements Fees

• Requirements
• Minimum firm size
• Minimum number of round lot holders/distribution
• Company position/stability within industries
• Minimum earnings, cash flow, global market
  capitalization

• Fees
• Listing fees formula
• Continuing annual fee formula 500,000 maximum
  yearly fee
• Attracts largest and most desirable U.S. and
  foreign firms
• http// www.nyse.com for more information

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Quick Quiz

• T or F
• Roughly 37,000 issues from more than 30,000
  companies are listed on the NYSE.
• T or F
• In the stock market, a round lot is 100 shares.
• T or F
• Listing on NYSE is open only to U.S. companies.
• T or F
• At the NYSE, each listed stock is assigned to a
  single post, where the auction process is managed
  by a floor trader.

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Major U.S. Securities ExchangesNASD-AMEX Market
Group (1998)

• NASD-AMEX Minimum listing requirements
• pretax income of 750,000
• public float of 3 million
• Public float the market value of common stock
  held by unaffiliated institutional and individual
  investors
• share price of 3
• three year operating history
• stockholders equity of 4 million
• 500,000 to 1 million shares available for trading

• National Association of Securities Dealers,
  Inc.industry self-regulation
• AMEXnations second largest floor-based stock
  exchange
• Market capitalization of over 100 billion
• Develops new investment products and innovative
  services

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OPTIONS

• Right to buy or sell a given amount or value of a
  particular asset at a fixed price until a given
  expiration date

• Call Option right to buy or call from the market
• Put Option right to sell or put on the market

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OPTIONS EXCHANGES

• Chicago Board Options Exchange (CBOE)
• Created standardized listed stock options
• Became the countrys 2nd largest securities
  exchange

• Worlds largest option exchange
• Options now traded on 5 U.S. exchanges
• Options on 1200 widely traded stocks plus broad
  indexes

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AUCTION MARKETS Futures Exchanges

• Futures Financially secured binding agreement to
  buy or sell a commodity at a future time
• Seven futures exchanges for agricultural,
  financial, and raw material products
• Largest 3 account for 90 of volume
• Chicago Board of Tradeag commodities
• Chicago Mercantile Exchangeforex
• New York Mercantile Exchangeoil products,
  precious metals

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QUICK QUIZ

• T or F
• U.S. futures and futures option trading is
  concentrated on seven major exchanges. Among
  these seven futures exchanges, the CBOT, CME and
  the New York Board of Trade are commonly regarded
  as the big three.
• T or F
• The CBOE is a forum for trading stocks.

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OVER-THE-COUNTER (OTC) MARKETS

• Negotiated marketsprice determined through
  bargaining, often electronically
• Nasdaq ranks second among worlds security
  markets in terms of total dollar volume
• Features market makers500 NASD member firms who
  represent stocks and compete to buy and sell
  stocks to customers

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NEGOTIATED VS. AUCTION MARKETS

• Nasdaq market makers compete for customer order
  floweach stock usually has 10 market makers
• Customer order flow customer sell/buy activity
  
• Bid offer to buy at a particular price
• Ask offer to sell at a particular price
• Spread difference between bid and ask prices
  represent market makers profits
• Inside market is narrowest spreadhighest bid and
  lowest offer prices

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QUICK QUIZ

• At the NYSE, the auction process for each listed
  stock is assigned to a

a. Broker b. Market Maker c. Dealer d. Special
ist
a. Broker b. Market Maker c. Dealer d. Special
ist
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NASDAQListing Requirements

• Significant net tangible assets or operating
  income
• Minimum public float of 500,000 shares
• At least 400 shareholders
• Bid price of at least 5
• Nasdaq competes with AMEX and NYSE for company
  listings

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Nasdaq SmallCap Market

• 1400 smaller companies that trade prior to
  listings on Nasdaq proper
• No penny stocksminimum share price 1
• Lower requirements, but safeguards for market
  credibility

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QUICK QUIZ

• T or F
• Nasdaq is an agency auction market.
• T or F
• On Nasdaq, each listed stock is assigned to a
  single post, where the specialist manages the
  auction process.
• T or F
• The difference between the price at which a
  market maker is willing to buy a security and the
  price which the firm is willing to sell is called
  customer order flow.
• T or F
• The spread, difference between bid and ask
  prices, in a Nasdaq security is the inside
  market.

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Over-the-Counter Bulletin Board (OTCBB)

• Regulated quotation service that displays
  real-time quotes,last-sale prices, and volume
  info in OTC securities
• Established as part of Penny Stock Reform Act of
  1990 to prevent manipulation and fraud
• Monitored by online market surveillance systems
• More information http// www.nasdaq-amex.com

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QUICK QUIZ

• T or F
• The OTCBB is an unregulated quotation service
  that displays real-time quotes, last sale prices,
  and volume information in OTC equity securities.

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KEY TERMSIndexes

• DJIA
• DJIA divisor
• SP 500 Index
• equity benchmark
• Russell 3000 Index
• Russell 1000 Index
• Wilshire 5000 Equity Index
• Nasdaq Composite Index
• Nasdaq 100 Index
• SP Midcap 400 Index

• Wilshire 4500 Index
• Russell 2000 Index
• SP SmallCap 600 Index
• FTSE-100
• Nikkei 225 Index
• TSE-35
• Hang Seng Index
• EAFE Index
• Emerging Markets vs. Developed Markets

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INDEXESDJIA

• Way to track stock market at a glance
• Started as simple averages of stock prices
• First was the Dow Jones Industrial Average, which
  is now a price-weighted average of 30 large
  industrial companies stock prices
• Now uses the DJIA divisor, an adjustment factor
  to account for splits and substitutions
• Formula Textbook

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DJIA-Problem

• DJIA Divisor 0.20142568
• (a)               A 1 rise in any component
  stock would cause the DJIA to rise by ______
  points.
• (b)               A 10 rise in a DJIA stock
  selling for 100 results in a ______ -point rise
  in the DJIA. A 10 rise in a DJIA stock selling
  for 200 results in a ______ -point rise in the
  DJIA
• a.       A 10 change in the value of a
  high-priced DJIA stock would have a much (larger,
  smaller) on the index than a similar percentage
  change in the value of a low-priced component.
• b.      (T, F) Higher-priced stocks tend to
  affect the index more than do the lower-priced
  stocks.
• (c)               A 1-point rise in the DJIA
  reflects an average increase in the price of each
  component stock of _________.
• (d)               DJIA 11,000. One share of all
  30 component companies costs roughly __________.

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DJIA-Problem
DJIA Divisor 0,15 DJIA 12000. A round lot
of all 30 component stocks has an investment cost
of _______. DJIA Divisor 0.15, a 100-point
rise in the DJIA reflects an average increase in
the price of each component stock of ______.
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LARGE-CAP INDEXES Largest Most Stable Companies

• SP 500 value-weighted average market index
• Most popular equity benchmark for institutional
  investors97 of money managers use it
• Broad cross-section of representative American
  companies75 of U.S.total market capitalization
• Uses 1941-43 as base year
• Formula Textbook

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SP 500-Problem

• (a) On September 28, 2000, the ratio of the
  closing market values of the SP 500 composite
  stocks to the 1941-1943 base-period closing
  market values was 145.829 which results in an
  index value of ______.
• (b)               September 28, 2000 SP 500
  Index 1458.29 The lowest SP 500 Index in the
  preceding 365-day period 1247.41.? It
  represented an increase of ____ in the market
  values of the stocks in the index.
• (c)               MSFT comprises roughly 4 of
  the market value of stocks included in the SP
  500 Index. On a day that MSFT stock rises by 2,
  it causes a rise in the SP 500 of ______.

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LARGE-CAP INDEXES Largest Most Stable Companies

• Russell 3000 and 1000 tracks largest companies
  in terms of total market capitalization
• Wilshire 5000 Equity Index tracks total dollar
  value of the US equity market by weighted stock
  valuesbroadest equity coverage.

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U.S. MIDCAP INDEXESOpportunities for Stable
Growth?

• Nasdaq Composite Index market-value weighted
  index of 5,000 Nasdaq stocks
• Nasdaq 100 largest Nasdaq issues across industry
  groups
• SP MidCap 400 Index 400 companies with total
  market cap between 1.5 and 10 million
• Wilshire 4500 6,700 companies stocks excludes
  SP 500. Accounts for about 25 of U.S. total
  market capitalization

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SMALL CAP INDEXESReady to Break Out?

• Small Caps publicly traded corporations with
  less than 1.5 billion in market capitalization
• Russell 2000 smallest companies, about 8 of
  total capitalization
• Usually young and growing firms list changes
  annually
• SP SmallCap 600 Index value weighted index of
  600 domestic stocks chosen for market size,
  liquidity, and industry group index is popular
  due to lower turnover

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GLOBAL STOCK INDEXES

• Nikkei 225 Index Japan is second largest
  national stock market index measures performance
  of 225 most liquid issues on Tokyo Stock Exchange
• FTSE 100 capitalization-weighted index of 100
  top market cap companies in 27 industries
• TSE-35 market basket of 35 blue-chip Canadian
  stocks listed on the Toronto Stock Exchange
• Hang Seng Index 33 largest companies from 10
  industries listed on Hong Kong market

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Morgan Stanley Capital International Indexes

• Global equity benchmarks for international and
  regional markets
• Most widely used benchmark by international
  portfolio managers
• EAFE Indextracks investment returns of 21
  developed countries outside of North America
• Emerging vs. developed markets

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KEY TERMSRegulation

• Securities and Exchange Commission (SEC)
• Self-regulatory organizations (SROs)
• NASD
• NYSE
• AMEX
• CBOE
• Municipal Securities Rulemaking Board

• Stock Watch
• Intermarket Surveillance Group
• Securities arbitration
• Circuit breakers and trading limits

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SECURITIES MARKET REGULATIONLegislation
Important to Investors,Issuers of Securities,
and Brokers/Dealers

• Securities Act of 1933
• Applies to firms going publicissuing new
  securities
• Requires firms to register with government
• Requires firms to provide investors with
  financial and material information
• Exempts private placements and small issues

• Securities Exchange Act of 1934
• Focuses on securities trading
• Creates and authorizes Securities and Exchange
  Commission (SEC) to enforce statutes, rules, and
  regulations
• Protects investors against fraud

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WALL STREET WISDOM

• Current competition for regulatory control
• Federal Reserve, Comptroller of Currency, and
  Federal Deposit Insurance Corporation each lay
  claim to authority
• 1999 Repeal of Glass-Steagall Act
• Among the questions who protects federally
  insured bank deposits in new landscape?

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Self-Regulatory Organizations (SROs)

• SEC delegates regulatory authority
• National Association of Securities Dealers (NASD)
• Regulates Nasdaq and OTC
• Monitors sales practices
• Administers tests and licenses for individuals
• Ensures accurate sales information
• NYSE, AMEX, CBOE--business practices and market
  operations
• Municipal Securities Rulemaking Board
• BanksFed Reserve, Comptroller of Currency, FDIC

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MARKET SURVEILLANCE

• NYSEs Stock Watch
• Flags unusual volume or price changes
• Investigates questionable trades
• Intermarket Surveillance Group
• Shares information and coordinates efforts to
  detect manipulation
• Securities Arbitration
• Circuit Breakers and Trading Limits

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Qualifying As Securities Professional

• Register with NASD and others
• Clear FBI screening
• Challenging exams
• Series 7 (stock brokers)
• Series 3 (commodities)
• State exams