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Securities Markets

Securities Markets. Reference: Chapter 3 BKM. How Firms Issue Securities. Primary Market: Market for new issues of securities Secondary Market: Market for already existing securities There are two types of primary market issues; IPO Seasoned

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Securities Markets

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  1. Securities Markets Reference: Chapter 3 BKM

  2. How Firms Issue Securities • Primary Market: Market for new issues of securities • Secondary Market: Market for already existing securities • There are two types of primary market issues; • IPO • Seasoned • Underwriting: Public offerings of both stocks and bonds typically are marketed by investment bankers who in this role are called underwriters • Firm Commitment vs. Best Efforts • Prospectus: A description of the firm and the security it is issuing

  3. How Firms Issue Securities (continued) • Underwriting Syndicate • Shelf Registration: Register securities and gradually sell them to the public for two years following the initial registration

  4. How Securities are Traded; Types of Markets • Direct Search Markets: • Least organized • Direct seeking by buyers and sellers • Commodity is low-priced, non-standard • Brokered Markets: • Active trading • Brokers have specialized knowledge • “Block Houses”

  5. How Securities are Traded; Types of Markets (continued) • Dealer Markets: Markets in which traders specializing in particular assets buy and sell for their own accounts • Dealer’s spread b/w bid and ask prices • OTC is an example • Auction Markets: A market where all traders meet at one place to buy or sell an asset • Continuous vs. Periodic

  6. Types of Brokers • Full service brokers are firms offering information (on different securities) and advice (for selling and/or buying) apart from usual services. • Discount brokers are firms offering less (or no) research services and will charge less. • Online brokers offer much similar services as full service brokers but trade interfaces are available to clients for online trading.

  7. Types of Brokers (at KSE) • Dealing or execution only, i.e., your broker deals for you and executes your instructions. • Advisory means the broker will offer you advice on buying, selling, or holding a specific scrip. • Discretionary; Broker takes all the buying and selling decisions, informs you regularly regarding your portfolio.

  8. Types of Brokerage Accounts • Cash account authorizes a customer for cash transactions only. • Margin account authorizes a customer to transact for a value greater than the available cash, i.e., use a loan. • Asset management account are unique, i.e., offering services such as investment of cash balances in funds and check writing facilities etc. • Wrap accounts are special types of accounts accumulating all costs in one fee.

  9. How Securities are Traded; Types of Orders • Bid price is the price at which a dealer or other trader is willing to purchase a security • Ask price is the price at which a dealer or other trader will sell a security • Bid-Ask spread is the difference between a dealer’s bid and asked price

  10. Costs Associated with Trading • Commission charged by the broker depends upon; • Price of a security; • Market in which the security is traded, etc. • CVT @ 0.02% of purchase price. • WHT @ 0.005% of sale value (replaced with FED).

  11. Placing Orders for Trading • An order may be classified on the basis of; • Type of transaction (e.g., buy or sell) • Price (e.g., market or limit) • Duration/Time (e.g., day or good till cancelled) • Orders may be placed through phone, in written, or online.

  12. Placing Orders for Trading • Bid (buy) order is placed if an investor wants to buy securities. • Offer (sell) order is placed if an investor wants to sell securities. • Short sale is the sale of borrowed stocks with the hope of returning them at lower prices. • Buy to cover is the sale executed to close out a short position.

  13. Placing Orders for Trading • Both bid & offer orders are; • Market or at Best orders, or • Limit orders, and/or • Stop orders • Limit order specifies a limit for the purchase (in bid order) or sale (in offer order) price. • An order is a market order if no price (purchase or sale) is specified by investor and is executed at available best market price. • An order to buy or sell a security when its price crosses the specified level is called stop order.

  14. Placing Orders for Trading • Orders may have Time in Force Restriction, i.e., • Day (market orders are always day orders) • Good Till Cancelled (GTC) (i.e. Open) • Good to Date (Month-Day-Year) (GTD) • Good for Week (GTW) • Good for Month (GTM) • Fill or Kill (FOK) (placed outside market hours, and executed in the immediate next trading session)

  15. Sorting Orders • Limit orders are ranked on the basis of price first, i.e., highest price in buy orders and lowest price in sell orders are settled first, and then on first come & first serve basis, i.e., two orders with same price will be ranked on which order reached the exchange floor first. • Limit orders will be executed only if the specified prices are available. • Unsettled limit orders are queued for future execution (up to 90 days) and do not lose priority. • Volume of the limit orders may not match for settlement.

  16. Sorting Orders • Market orders are settled with the top limit order. • If partially completed the market order is fulfilled from the next available limit order in the queue. • Must be executed immediately.

  17. Sorting Orders • Stop orders are of two main types; • Stop Buy Order • Stop Loss Order • Stop buy order specifies a price which if breached triggers buying. • Used by momentum traders who wish to take advantage when the stock price has moved upwards past a threshold level indicating upward momentum that is expected to continue.

  18. Sorting Orders • Stop loss order is an order to sell stock if the price lowers than the specified price. • Useful when investor wants to limit losses, especially during short selling.

  19. Sorting Orders • Following terminologies are often encountered in trading; • Tick Size; the minimum amount that a price of stock may change by. It is one paisa at KSE. • Circuit Breakers/Locks; Level at which trades are stopped in a particular scrip. At KSE trading is restricted in upper & lower limits of 5% or Re. 1/-, whichever is higher/lower, from last closing price. • Market Lot; Minimum tradable quantity of shares.

  20. Execution of Orders on Trade Screen • A partial trade screen looks like; • Hypothesize a company with a ticker/symbol XYZ.

  21. Execution of Orders on Trade Screen • Investor A wants to buy 1000 shares of XYZ @ Rs. 10.00 (a limit order); • Investor B wants to sell 500 shares of XYZ @ Rs. 10.80 (a limit order)

  22. Execution of Orders on Trade Screen • A bid (buy) market order for 250 shares of XYZ reaches; • A sell (ask) market order for 500 shares reaches;

  23. Execution of Orders on Trade Screen • A bid limit order reaches of 500 shares @ Rs. 10.01 per share; • A sell (ask) limit order for 500 shares @ Rs. 10.75 per share reaches

  24. Execution of Orders on Trade Screen • Following orders reach the exchange; • Bid limit order of 500 shares @ Rs. 10.50, and • Ask limit order of 250 shares @ Rs. 10.50 Prices are matching but quantities are not. 250 shares @ Rs. 10.50 will be transferred to the bid trader.

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