Organization And Functioning Of Securities Markets PDF

ORGANIZATION AND FUNCTIONING OF SECURITIES MARKETS  What is a market? The means through which buyers and sellers are brought together to aid in the transfer of goods and services Does not require a physical location “The market” itself does not have to own the goods and services involved...

ORGANIZATION AND FUNCTIONING OF SECURITIES MARKETS  What is a market? The means through which buyers and sellers are brought together to aid in the transfer of goods and services Does not require a physical location “The market” itself does not have to own the goods and services involved Buyers and sellers benefit from the market  Characteristics of a Good Market Availability of past transaction information ⚫ must be timely and accurate Liquidity: sell quickly at a good price ⚫ marketability ⚫ price continuity ⚫ depth Transaction cost are low (Internal efficiency) Prevailing market prices reflect all relevant information (External efficiency)  Organization of the Securities Market Primary markets ⚫ New issues Secondary markets ⚫ Outstanding securities are bought and sold Primary Capital Markets Government Bonds Sold regularly through auctions Treasury bills: one year maturity or less Treasury notes: maturities of two to ten years Treasury bonds: original maturities of more than ten years Primary Capital Markets Municipal Bonds Sold by three methods ⚫ Competitive bid sales: sealed bids ⚫ Negotiated sale: contractual arrangements, underwriter helps prepare, price, and sell the issue ⚫ Private placements: Issuer sells directly to investors Underwriters services ⚫ Origination: design of the issue ⚫ Risk-bearing: purchase the issue, risk reselling ⚫ Distribution: selling the issue Primary Capital Markets Corporate Bonds Negotiated arrangement with an investment banking firm who maintains a relationship with the issuing firm Underwriting firm often organizes a syndicate for distribution Primary Capital Markets Common Stock New issues are divided into two groups Seasoned new issues ⚫ New shares offered by firms that already have stock outstanding Initial public offerings (IPOs) ⚫ Firms selling their stock to the public for the first time New issues normally underwritten by investment banking firms Secondary Markets Involves the trading of issues that are already outstanding Provide a means obtaining cash for sellers Provide buyers with more investment choices Why Secondary Markets Are Important Provide liquidity to investors who acquire securities in the primary market ⚫ Helps issuers raise needed funds in the primary market since investors want liquidity Help determine market pricing for new issues  National Stock Exchanges Large number of listed securities Listing often seen as a sign of prestige Wide geographic dispersion of listed firms Diverse clientele of buyers and sellers Firms wanting to list must meet listing requirements  American Stock Exchange (AMEX) Started by a group who traded unlisted stocks at the corner of Wall and Hanover Streets in New York as the Outdoor Curb Market Emphasis on foreign securities Doesn’t trade stocks listed on NYSE Merged with Nasdaq in 1998, although operations remain separate Tokyo Stock Exchange (TSE) Largest of the eight exchanges in Japan Dominates Japanese market Established in 1878 and reorganized in 1943, 1947, and 1949 Domestic and foreign stocks listed Most active 150 stocks are traded on floor, others by computer London Stock Exchange (LSE) Largest securities market in the United Kingdom Trades listed and unlisted securities Largest listing of foreign stocks on any exchange Stocks divided into three groups ⚫ Alpha - 65 most active ⚫ Betas - 500 next most active ⚫ Gamma - bids are indicative only and must be confirmed The Global Twenty-four Hour Market Investment firms “pass the book” around the world to maintain nearly continuous trading by utilizing markets at Tokyo, London, and New York This means that the markets are increasingly interrelated, moving toward a single world market Over-the-Counter (OTC) Market Not a formal organization or a single location Trading in unlisted stocks and listed stocks (third market) Lenient requirements for listing on OTC Almost 5,000 issues actively traded on Nasdaq’s NMS ( National Market System) More issues traded, but less dollar trading in terms of total value than NYSE  Third Market OTC trading of shares listed on an exchange Mostly well known stocks ⚫ GM, IBM, AT&T, Xerox Represents competition between the OTC market and the organized exchanges May be important to investors particularly when the exchange is closed or when trading is suspended on the exchange  Fourth Market Direct trading of securities between two parties with no broker involved Both parties typically large, institutional investors making large trades Savings in transaction costs can be large for such investors to deal directly with one another