Securities Markets

1. Securities Markets

2. The Importance of Financial Markets • The financial markets permit both business and government to raise the needed funds by selling securities. • Simultaneously, investor with excess funds are able to invest and earn a return, enhancing their welfare.

3. The Primary Markets • A primary market is a one in which a borrower issues new securities in exchange for cash from the investor (buyer). • New sales of stocks or bonds all take place in the primary markets. • Initial public offerings (IPOs): Common stock shares of a company being sold for the first time. • Once the original purchaser sell the securities, they trade in secondary markets.

4. The Investment Banker • The investment banker is the middleman between a company issuing new securities and the public. • The issuer sells its securities to investment bankers, who in turn sell the securities to investors. (Underwriting) • The investment bankers can provide important advice to their clients during the planning stage preceding the issuance of new securities. • Investment bankers buy the securities from the issuer at a discount. The bankers own the securities until they are sold.

5. Investment Banker • Investment bankers can form a syndicate or group of investment bankers. • A lead investment banker can act as a global coordinator linking separate underwriting syndicates worldwide. • Private placement: whereby new securities issues are sold directly to financial institutions, such as life insurance companies and pension funds.

6. The Secondary Markets • Markets where existing securities are traded among investors. • Secondary markets are divided to: • Equity securities: • markets • Negotiated markets • Bonds markets. • Derivatives markets.

7. Equity Securities- Markets • Securities market where the price of securities are determined by actions of buyers and sellers. NYSE and ASE. • Broker: An intermediary who presents buyers and sellers in securities transactions and receives a commission.

8. Equity Securities- Markets • The NYSE has specific listing requirements that companies must meet in order to be listed. • The NYSE pays attention to degree of national interest in the company, its relative position, stability in the industry and specific amount of earning power. • Block transactions: involve at least 10,000 shares.

9. Equity Securities-Negotiated Markets • Over-the counter (OTC) market is a negotiated market consisting of a network of dealers who make a market by standing ready to buy and sell securities at specified prices. • This market handles unlisted securities. • Most of the actively traded OTC stocks are part of the Nasdaq stock market showing current bid-ask prices for thousands of stocks.

10. Equity Securities-Negotiated Markets • Nasdaq stock market does not have a specific location. • It consists of network of market makers (A broker/dealer who is registered to trade in a given security on the Nasdaq) linked together by communications devices who compete freely with each other.

11. Equity Securities-ECNs • Electronic communications network is a computerized trading network that matches buy and sell orders electronically entered by members of the ECNs. (Small exchanges under SEC) • If no match is currently possible, ECN post the order on Nasdaq’s trading screen.

12. Stock Market Indicators • A market index measures the current price behavior of the sample in relation to a base period. • There are many stock market indicators such as: • The Dow-Jones Industrial Average. • Standard & Poor’s Stock Price indexes.

13. Stock Market Indicators • The Dow Jones Industrial Average (DJIA). • It is a price weighted series of 30 leading industrial stocks (large, well-established, and well-known companies). • It is criticized for being price weighted and using only 30 stocks.

14. Stock Market Indicators • Standard & Poor’s Stock Price indexes. • Standard & Poor’s corporation publish different market indices, one of which is S&P 500 (which is market value index of stock market activity covering 500 stocks. • It is expressed in relative numbers which is a base period (1941-1943). • Unlike the DJIA, each stock’s importance is based on relative total market value instead of relative per-share price.

15. Relationships between Stock Indexes • The relationship between the price changes for the three indexes (S&P, NYSE, and DJIA) has been very high (0.90). • Major market indexes tend to show strong similarities.

16. Bonds Markets • Investors can purchase either new bonds being issued in the primary market or existing bonds outstanding in the secondary market. • NYSE has the largest bond market in the world, with an automated bond system (ABS). • ABS is a fully automated trading system that allows subscribing firms to directly enter and execute bond orders from their own terminals.

17. Bonds Markets • The market for bonds at US is primarily OTC. • Investors can buy and sell bonds through their brokers, who in turn trade with bond dealers. • Treasury bonds: Federal Reserve conducts open-market operations with Treasury securities where many large banks act as dealers in particular issues.

18. Bonds Markets • Agency bonds: Federal agency securities trade in good secondary markets with market dealers and procedures used as in the case of Treasury securities. • Municipals bonds: Municipal securities often have a relatively thin market with moderate activity in the secondary market because most of these bonds are held to maturity.

19. Bonds Markets • Corporate bonds: Most corporate bonds are traded off the exchanges by institutions dealing in lots. A computer collects bids to buy and offers to sell from around the country and execute the trade when a match is made.

20. Derivatives Markets • Options trade on the floor of exchanges, such as the Chicago Board Options Exchange, using a system of market makers. • Options: A bid and asked price is quoted by the market maker, and floor brokers can trade with the maker or with other brokers.

21. Derivatives Markets • Futures contracts are traded on exchanges in designated “pits” using as a trading mechanism an open-outcry process. • The pit trader offers to buy or sell contracts at an offered price and other traders are free to transact if they wish.

22. Egyptian Stock Exchange Indexes • Market Capitalization (Mkt Cap) = • Last closing price x Number of listed shares • General Index: • Includes all companies listed in the stock. • General Index = [Mkt Capt / Mkt Cap0]x 100 • CASE 30 Index: • CASE 30 index includes the top 30 companies in terms of liquidity and activity.

23. Egyptian Stock Exchange Indexes • CASE 30 Index = Mkt Capt / Divisor. • Divisor: • Calculate the Mkt Cap of companies at starting date (t=0) • Set starting value of index (100) • Index Divisor = Mkt Cap0 / Index Value (100) • Divisor = Adjusted Mkt Capt / Previous index level

24. 800 1000 750 700 800 CASE 30 General Index 650 600 600 550 400 50 100 150 200 250 300 350 400 CASE30 INDEX CASE 30 and General Index of Egypt from January 2002 to October 2003

25. Statistics for the Egyptian Stock Exchange (September 2003) • Value traded of listed securities vs. OTC • Listed = 89% • OTC = 11% • Trading by type of securities in terms of value • Common Shares = 96% • Bonds = 4%

26. Statistics for the Egyptian Stock Exchange (September 2003) • Retail vs. institutional investors in terms of value traded • Institutional = 37% • Retail = 63% • Foreigners vs. Egyptians in terms of value traded • Egyptians = 72% • Foreigners = 28%

27. Clearing & Settlement Process Trade Post Trade Client B Client B Securities Depository Buyer + Seller - Buying Broker Buying Broker DVP Settlement On T+3 Stock Exchange CSD Selling Broker Selling Broker Funds Settlements Bank Buyer - Seller + Client S Client S