Kế toán, kiểm toán - Chapter 1: Web extension 1C - A closer look at the stock markets

Chapter 1Web Extension 1CA Closer Look at the Stock Markets 1Topics in Web ExtensionStock indexesRegulationOverview of investment bankingStock trading2Stock Indexes Stock indexes try to measure some aspect of the marketThe differ with respect to:Composition (types of stock in the index)Weighting (how the individual stocks are aggregated into an index)(More . .)3Index Composition Replicate a particular exchangeMeasure a country’s most important stocksMeasure a particular business sectorMeasure a particular investment “style”Measure an international region(More . .)4Composition by ExchangeNYSE CompositeNasdaq Composite(More . .)5Composition by Business Sector Many different index providers, such as:Dow JonesAmexMorgan StanleyMany different sectors, such as:AirlinesBiotechnologyChemicalsConsumer retailersTechnology 6Composition by “Style” Two important investment styles are by the size of the firm and by its growth prospects. Growth is measure by high-expected sales growth and high price-book ratios (value stocks have lower growth and lower price-book ratios) Examples:Russell 1000 GrowthRussell Midcap Value7Composition by International RegionMorgan Stanley Capital International (MSCI)EAFE (Europe, Asia, Far East) IndexEmerging Markets IndexPacific Index8Stock Weighting in IndexesPrice weighted DJIAMarket-value weighted S&P500Nasdaq CompositeEqually weighted Value Line Index9Regulation of Securities MarketsGovernment Regulation– such as SEC.Insider trading oversight (SEC)Margin oversight (Federal Reserve)Self-regulation– such as NASD.Circuit Breakers– automatic halt in trading if stock prices have exceptional changes.10Public vs. Private OfferingsPublic offerings: registered with the SEC and sale is made to the investing public.Shelf registration (Rule 415, since 1982) allows firms to register an offering and sell parts of the offering over time.Private offering: Sale to a limited number of sophisticated investors not requiring the protection of registration.Dominated by institutions.Very active market for debt securities.Not as active for stock offerings.11Investment Banking and Security OfferingsUnderwritten vs. “Best Efforts”Underwritten: firm commitment on proceeds to the issuing firm.Best Efforts: no firm commitment.Negotiated vs. Competitive BidNegotiated: issuing firm negotiates terms with investment banker. Usually a 7% spread.Competitive bid: issuer structures the offering and secures bids (more common in bonds than stocks).12Initial Public OfferingsInitial Public Offerings (IPOs)Underpricing—Average increase is 14% on first day.Performance– Underperforms similar stock during three years after IPO.13Costs of TradingCommission: fee paid to broker for making the transactionSpread: cost of trading with dealerBid: price dealer will buy from youAsk: price dealer will sell to youSpread: ask - bid“Price Impact”– Large sales or purchase might cause prices to change.“Payment for Order Flow”– Exchange will pay brokers to direct orders to them.14The Specialist at the NYSEHandles around 10-20 stocks (one per specialist)Stocks trade at the “specialist’s post”“Makes a market” by matching buyers/seller and by buying/selling from own inventoryGoal is to “maintain a fair and orderly market” so that price changes are smoothSpecialist loses money when smoothing the market, but makes it back during normal conditions15Trading Away from ExchangesThird Market– trading listed stocks but not through exchangeInstitutional market: to facilitate trades of larger blocks of securities.Involves services of dealers and brokersFourth Market– institutions trading with institutionsNo middleman involved in the transaction16Margin TradingInvestor uses only a portion of own capital for an investment.Borrows remaining component.Margin arrangements differ for stocks and futures.17Stock Margin TradingMaximum initial marginCurrently 50%Set by the FedMaintenance marginMinimum level of equity margin if prices changeMargin callCall for more equity funds18Short Sales MechanicsOpening a short position:Borrow stock through a dealer.Sell itDeposit proceeds and margin in account.Closing out the position: Buy the stock Return to the party from which it was borrowed.19Short Sales Purposes and FeaturesPurpose: to profit from a decline in the price of a stock or security.Must pay the broker the equivalent of any dividends paid by the stock“Uptick” restrictions– can only sell short when the ask price of a stock is higher than the last transactionUnlimited loss potential20