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Chapter 18

Chapter 18. COMMON STOCK MARKETS IN THE UNITED STATES. Characteristics of Common Stock. Equity securities = ownership share of a corporation. Common (junior) stockholders are the residual owners: Right to income Right to assets

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Chapter 18

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  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. 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 (US) Stock Exchanges

  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: needn’t 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. 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: dereg’d NYSE

  8. 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 OTC Market (2nd, 3rd)

  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. 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 Trading Mechanisms

  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 > 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 S&P500 firms)

  12. Stock Market Indicators • Dow Jones Industrial Average (30 largest NYSE ‘blue chip’) • NYSE Composite (all NYSE) • NASDAQ Composite (all NASDAQ OTC) • S&P 500 (500 NYSE listed + OTC) • AMEX • Value Line Composite Average

  13. Pricing Efficiency of the Stock Market • Forms of Efficiency • Weak form: can’t 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. 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 Stock Market Indexes

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