Stock Market & Market Indices

1. Stock Market & Market Indices

2. Types of Markets • Stock Exchanges Trading of stocks listed in an exchange • OTC Trading Trading ‘over the counter’ or outside a stock exchange, in dealer networks • ECNs Electronic Communication Network is an electronic system that allows order execution between exchanges and dealer networks

3. Trading Mechanics • Types of orders • Short selling • Buying on the margin

4. Types of orders • Instructions from investors to brokers • Market order • buy/sell order to be executed at best price -- get lowest price for buy order -- get highest price for sell order • market orders given priority in trading • no guarantee of execution price

5. Types of orders • Limit order • buy/sell order where investor specifies price range • “buy at $50 or less” • “sell at $52 or more” • investor sets reservation price but no guarantee that limit order will be executed

6. Types of orders • Stop order • order lies dormant • turns into market order when certain price (“the stop”) is reached • “buy if price rises to $60” • “sell if price falls to $58” • investor does not have to watch market but in a volatile market stop could be triggered prematurely

7. Types of orders • Stop limit order • Turns into limit order when stop is reached • “buy if price rises to $60, but only is executed at $65 or less” • “sell if price falls to $58, but only is executed at $55 or more”

8. How long is an order good? • IOC (Immediate or Kill) • FOK (Fill or Kill) • Day (Only on current day) • GTD (Good till Date) • GTT (Good till Time) • GTC (Good till Cancelled) • OPG (participate in Opening Auction only)

9. Order Size • Round lots • lots of 100 shares • Odd lots • less than 100 shares • more difficult to trade • Block trades • 10,000 shares or $200,000 value

10. Short Selling • Sale of borrowed stock • Profit from belief that stock price is too high and will fall soon • borrow stock through broker • sell stock • buy and return later • Short selling could further destabilize falling prices

11. Short Selling • Short sales allowed if • uptick or zero uptick in price for previous trades: • $20, $21 (uptick) • $20, $20, $21 (zero uptick) • $21, $20 (downtick)

12. Buying on the margin • Buyer borrows part of purchase price of stock, using stock as collateral • borrow at call money rate/PLR • SEC sets initial margin requirement • Currently 50% of stock holding

13. Buying on the margin • If stock price falls • collateral worth less • if collateral worth only 125% of loan (maintenance margin) -- margin call -- owner must put up more cash or sell stock • margin calls can worsen stock crash

14. Buying on the margin Problem: • 1000 shares, $20 per share out of which 50% is bought on margin • Leverage • gains/losses on $20,000 capital • but tied up only $10,000 capital • If prices falls to $12 the value of stock is $12,000. This is below 125% of $10,000 loan. Therefore we will get a margin call

15. Stock market indicators • Measure average performance of a group of stocks • The group of stocks can include the entire market or an entire sector or a selection of stocks based on some criteria

16. Stock Exchange index Includes all stocks listed on exchange • NYSE Composite All stocks listed in the New York Stock Exchange • Nasdaq Composite All stocks listed in the Nasdaq Stock Exchange • ASPI All stocks listed in the Colombo Stock Exchange

17. Subjectively selected index Organization picks group of stocks according to various criteria • Dow Jones Industrial average 30 largest industrial stocks in U.S. that are generally the leaders in their industry. • S&P 500 500 largest stocks based on market capitalization in the U.S. stock market • S&P SL 20 20 largest stocks based on market capitalization in the Colombo Stock Exchange