41. Market Organization and Structure Part 2

• Main functions of the financial system include allowing savings, borrowing, raising capital, and managing risk.
• Financial systems determine equilibrium rates of return based on lending and borrowing.
• They allocate capital to its most productive uses.
• Central banks usually control the money supply.

Brokered Markets

• Brokered markets suit unique items like fine art.
• Brokers locate counterparties to add value.

Margin Return

• An investor buys 1,000 shares at $18 with a 40% initial margin and 30% maintenance margin.
• After a year, the investor sells the stock at $24.
• The margin return calculation is [((Ending Value - Loan Payoff) / Beginning Equity Position) – 1] * 100.
• The margin return % is 83.33%.
• Margin call price calculation: (original price) × (1 – initial margin) / (1 – maintenance margin).
• The margin call price is $15.43.

Return on Investment

• An investor buys 200 shares of Mertz, Inc. at $40 with initial and maintenance margins of 50% and 25%.
• The stock is sold at $50 at year-end.
• Profit is $2,000.
• Return on investment is 50%.

Securities Markets

• A limit buy order is below the current market price.
• A stop-buy order is above the current market price.
• Stop-buy orders are used to protect a short sale from a rising market.
• Well-functioning securities markets include timely and accurate information, liquidity, marketability, price continuity, depth, operational efficiency, and informational efficiency.

Margin Call Price

• An investor buys 100 shares of Lloyd Computer at $26 with a 50% initial margin and a 25% maintenance margin.
• The margin call price is closest to $17.33.

Equity Securities

• Common stock and warrants are equity securities
• Certificates of deposit are debt securities
• Exchange-traded funds are pooled investment vehicles.

Primary Market Transaction

• A primary market transaction involves the sale of new securities to investors.
• Primary markets are for the new issuance of securities.

Short Seller Responsibilities

• A short seller pays dividends to the lender
• A short seller loses if stock prices increase
• A short seller is required to post a margin account
• A short seller uses a stop-buy order to protect against a rising market.

Short Sale Accuracy

• Proceeds from a short sale remain in the brokerage account with the required margin deposit.

Futures Contract

• Jerry Slotz enters an exchange-traded contract that requires the purchase of an asset at a future date.
• This contract is a futures contract.
• Futures are standardized contracts, traded on an exchange, that obligate the purchase or sale of an asset at a specific price on a future date.
• Forward contracts are similar to futures contracts but are customizable and traded over-the-counter.
• Options provide the right, not the obligation, to purchase an asset at a future date.

Financial Intermediaries

• Securitizers are financial intermediaries that issue securities representing interests in pools of similar financial assets like mortgages or loans.
• Block brokers assist clients with large trades of securities.
• Arbitrageurs buy and sell the same asset in different markets for profit.

Capital Market

• A securities exchange trading long-term government bonds is part of the capital market.
• Securities are first issued in the primary market and then traded among investors in the secondary market.
• The money market handles short-term debt instruments, typically with maturities less than one year.

Margin Transaction Return

• An investor purchases 200 shares at $100 on full margin with a 40% initial and 25% maintenance margin.
• The shares are later sold for $200.
• The return on the margin transaction is 250%.

Market Order

• A market order sells a security at the best price available.
• A limit order buys at a specified limit price or lower, or sells at a specified limit price or higher.
• A stop order buys if the market price increases to the specified stop price, or sells if the market price decreases to the stop price.

Initial Margin

• The initial margin is the minimum amount of funds for purchasing a security on margin.
• Margin is the amount of equity in the account at a given time.

Margin Call Price Calculation

• An investor buys 200 shares of ABC at $100 with an initial margin of $8,000 and a maintenance margin requirement of 25%.
• The share price that reduces the account balance to the maintenance margin level is $80.

Limit Order to Sell

• A limit order to sell specifies a price that can be higher or lower than the current market price
• Price limits on buy or sell orders can be above, at, or below the current market price.

Least Likely Limit Orders

• A "behind the market" limit buy order is the least likely to be filled.
• "Behind the market" refers to a buy order with a limit price less than the best bid, or a sell order with a limit price higher than the best ask.
• "Inside the market" refers to orders with limit prices between the best bid and best ask.
• "Aggressively priced" refers to a buy order with limit prices higher than the best ask or a sell order with a limit price lower than the best bid.
• Aggressively priced limit orders are the most likely to be filled immediately.