Professional Documents
Culture Documents
Management
Chapter 4
Securities Markets and the Economy
What Is A Market?
Primary Capital Markets
Secondary Financial Markets
Classification of Secondary Equity Markets
Detailed Analysis of Exchange Markets
Uses of Security-Market Indices
Differentiating Factors
Bond Market Indices
Composite Stock-Bond Indices
Comparison of Indices Over Time
Copyright 2010 by Nelson Education Ltd.
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What is a Market?
Brings buyers and sellers together to aid in the
transfer of goods and services
Does not need to have a physical location
Does not necessarily have to own the goods and
services
Can deal in any variety of goods and services
Both buyers and sellers benefit from the market
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Secondary markets
outstanding securities are bought and sold by
investors
issuing unit does not receive any funds in a
secondary market transaction
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Primary Markets
Corporate Bond Issues
Corporate bond issues are almost always
sold through a negotiated arrangement
with an investment banking firm that
maintains a relationship with the issuing
firm.
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Primary Markets
Stocks (Equities) Issues
Seasoned new issues: New shares offered by
firms that already have stock outstanding
Initial public offerings (IPOs): A firm selling
its common stock to the public for the first
time
These new issues are typically underwritten
by investment bankers
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Primary Markets:
Underwriting a Corp. Bond or Equity Issue
The investment
banker purchases the
entire issue from the
issuer and resells the
security to the
investing public.
The firm charges a
commission for
providing this service.
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Primary Markets:
Relationships with Investment Bankers
Negotiated
Most common
Full services of underwriter
Competitive bids
Corporation specifies securities offered
Lower costs
Reduced services of underwriter
Best-efforts
Investment banker acts as broker
Copyright 2010 by Nelson Education Ltd.
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Primary Markets
Short Form Prospectus Distribution
Reduces repetitive filings for large firms
Referred to as OSC Short Form Prospectus
Distribution System (SPDF)
To issue new securities the issuer only needs to
provide supplementary information
Approval process is usually days
Reduces pricing risk for underwriters & issuers
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Primary Markets
Private Placements
These securities can subsequently be
traded among large sophisticated investors
Lower issuing costs than public offering
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Secondary Markets:
Why Are They So Important?
Provides liquidity to investors who acquire
securities in the primary market
Results in lower required returns than if
issuers had to compensate for lower liquidity
Helps determine market pricing for new
issues
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Financial Futures
Bond futures are traded in exchanges
such as:
Chicago Board of Trade (CBOT)
Chicago Mercantile Exchange (CME)
Bourse de Montreal
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Dealer Market
Individual dealers provide liquidity for investors
by buying and selling the shares of stock for
themselves (known as quote-driven market)
Copyright 2010 by Nelson Education Ltd.
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A Margin Transaction
Total Stock Value ($60 X 200)
$12,000
- $5,000
$7,000
58%
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20%
40%
$350
31%
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20%
- 40%
$350
- 49%
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Margin Transaction
What would be your percentage return on investment (ROI)
if the price of the stock rose to $60? If the maintenance margin is 30%,
what is the margin call price?
(200P -$5,000)
Margin (%)
(200P-$5,000) 200P
(200P-$5,000)200P = 30%
$35.71
At $35.71 per share youll be required to either sell and take a loss or
fund your margin account with additional cash.
Copyright 2010 by Nelson Education Ltd.
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Differentiating Factors
The Sample
Size
Breadth
Source
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Differentiating Factors
Computational Procedure
Arithmetic average
Compute an index and have all changes,
whether in price or value, reported in
terms of the basic index
Geometric average
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Stock
A
B
C
Index
Divisor
Period T
Case A (T+1)
A
100
110
B
50
50
C
30
30
Sum
180
190
Divisor
3
3
Average
60
63.3
Percentage Change
5.5%
Case B (T+1)
100
50
33
183
3
61
1.7%
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Value-Weighted Indices
Derive the initial total market value of all stocks
used in the series
Market Value = Number of Shares Outstanding
X Current Market Price
Assign an beginning index value (100) and new
market values are compared to the base index
Automatic adjustment for splits
Weighting depends on market value
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Index t
PQ
where:
Index t = index value on day t
Pt = ending prices for stocks on day t
Qt = number of outstanding shares on day t
Ph = ending price for stocks on base day
Qh = number of outstanding shares on base day
Copyright 2010 by Nelson Education Ltd.
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Unweighted Index
All stocks carry equal weight regardless of price or
market value
May be used by individuals who randomly select
stocks and invest same dollar amount in each stock
Some use arithmetic average of the percent price
changes for the stocks in the index
Value Line and Financial Times Ordinary Share Index
compute a geometric mean of the holding period
returns
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Unweighted Index
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Style Indices
Small-cap growth
Mid-cap Growth
Large-cap growth
Small-cap value
Mid-cap value
Large-cap value
Socially responsible investment (SRI) indexes
By country
Global ethical stock index
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Bond-Market Indices
Investment Grade Bond Indices
Various firms created and maintained
indices for government & other bonds
Bond ratings of BBB or higher
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Bond-Market Indices
High-Yield Bond Indices
Fastest growing segment of the bond
market over the past 25 years
Bonds rated BBB or lower
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