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CHAPTER 7 SECONDARY MARKETS. Fuctions of the Secondary Markets It provides information about the value of the security. It provides information about.

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Presentation on theme: "CHAPTER 7 SECONDARY MARKETS. Fuctions of the Secondary Markets It provides information about the value of the security. It provides information about."— Presentation transcript:

1 CHAPTER 7 SECONDARY MARKETS

2 Fuctions of the Secondary Markets It provides information about the value of the security. It provides information about the value of the security. It provides liquidity to the investors. It provides liquidity to the investors. It provides information to the investors about the assets fair values. It provides information to the investors about the assets fair values. It brings together many interested parties and so can reduce the cost of searching likely buyers and sellers of the asset. It brings together many interested parties and so can reduce the cost of searching likely buyers and sellers of the asset. By accomadating many trades they keep the cost of transactions low. By this way they ancourage investors to purchase assets. By accomadating many trades they keep the cost of transactions low. By this way they ancourage investors to purchase assets.

3 Trading Locations Secondary market exist throughout the world. Secondary market exist throughout the world. In US, many shares are traded on major national and regional stock exchanges. Additional significant trading in stocks take place on OTC markets. Some bonds are traded on exchanges however most bonds are trade on OTC markets. In US, many shares are traded on major national and regional stock exchanges. Additional significant trading in stocks take place on OTC markets. Some bonds are traded on exchanges however most bonds are trade on OTC markets. Londan International Stock Exchange is an OTC market. Assets that are traded in this market include stocks of domestic and international firms, bonds and options. Londan International Stock Exchange is an OTC market. Assets that are traded in this market include stocks of domestic and international firms, bonds and options. Germany has 8 stock exchanges, the most important of which is Frankfurt Stock Exchange. Germany has 8 stock exchanges, the most important of which is Frankfurt Stock Exchange. Paris Bource is the Frances main secondary market for stocks, bonds and some derivative instruments. Paris Bource is the Frances main secondary market for stocks, bonds and some derivative instruments. Japan has 8 exchanges, the largest is Tokyo Stock exchange and the second largest is Osaka Stock Exchange. Japan has 8 exchanges, the largest is Tokyo Stock exchange and the second largest is Osaka Stock Exchange.

4 Market Structures Many secondary markets are continuous markets: prices are determined continuesly throughout the trading day as buyers and sellers submit orders. Many secondary markets are continuous markets: prices are determined continuesly throughout the trading day as buyers and sellers submit orders. A contrasting market structure is the call market, in which orders are batced or grouped together for simultaneous execution at the same price. The market maker can hold an auction for a stock. A contrasting market structure is the call market, in which orders are batced or grouped together for simultaneous execution at the same price. The market maker can hold an auction for a stock.

5 Perfect Markets In perfect market, the nr. of buyers and sellers is sufficiently large and all participants are small enough relative to the market, so that no one can influence the prices. In perfect market, the nr. of buyers and sellers is sufficiently large and all participants are small enough relative to the market, so that no one can influence the prices. In perfect market transaction costs and taxes (frictions) do not effect the prices and investors behavior. In perfect market transaction costs and taxes (frictions) do not effect the prices and investors behavior.

6 SECONDARY MARKET TRADING MECHANISM Types of Orders Market Order Limit Order Stop (Stop-Loss) Order Stop-limit Market Order: It is an order to buy or sell the security at the best price available. Market Order: It is an order to buy or sell the security at the best price available. When this order reaches to the trading floor, its execution is sure and immediate. When this order reaches to the trading floor, its execution is sure and immediate.

7 Limit Orders: These are the orders to buy or sell a security at a specified price or better. To avoid the danger of the market order which is the adverse unexpected price changes between the time investor places the order and the time the order is executed, an investor can place the limit order. A buy limit order indicates that the security may be purchased only at the designed price or lower. A sell limit order indicates that the security may be sold only at the designed price or higher. For exp. You want to buy stock A at $42 and do not want to pay more than this amount, you places a limit order at $42. Or you want to sell stock B at $65 and do not want to sell less than this amount, you places a limit order at $65. There is no guarantee it will be executed at all.

8 Stop Order (Stop-loss order): The order is not to be executed until the market moves to a designed price, at which time it becomes a market order. Stop Order (Stop-loss order): The order is not to be executed until the market moves to a designed price, at which time it becomes a market order. A stop order to buy specifies that the order is not to be executed until the market rises to a designated price. A stop order to sell specifies that the order is not to be executed until the market price falls below a designated price. For exp. You are uncertain about buying the stock of A at its current price of $42 but want to be sure that if the price moves up you do not pay more than $45. If you places a stop order to buy at $45, the order becomes a market order when the price reaches $45. If you want to assure that you will not sell stock B at less than $60, you can place a stop order to sell at $60. - Security prices sometimes exhibit abrupt price changes, so the direction of a change in a securitys price may be temporary. - Once a designated price is reached, the stop order becomes a market order and is subject to the uncertainity of the execution price.

9 Stop-limit Orders: Combination of stop order and limit orders to buy or sell at a specified price or better only after a given stop price has reached. Stop-limit Orders: Combination of stop order and limit orders to buy or sell at a specified price or better only after a given stop price has reached. In contrast to the stop order, which becomes a market order if the stop is reached, the stop limit order becomes a limit order if the stop is reached. In contrast to the stop order, which becomes a market order if the stop is reached, the stop limit order becomes a limit order if the stop is reached. Buy stock A $42 stop, $45 limit, If the market price reached $42, the broker enters a limit order to be executed at $45 or better (lower) price. Buy stock A $42 stop, $45 limit, If the market price reached $42, the broker enters a limit order to be executed at $45 or better (lower) price.

10 Market Efficieny Operational Efficiency: In this market investors can obtain transaction services as cheap as possible. Operational Efficiency: In this market investors can obtain transaction services as cheap as possible. Pricing (Information) Efficiency It refers to a market where prices immediately and fully reflect all available information that is relevant to the valuation of securities. Pricing (Information) Efficiency It refers to a market where prices immediately and fully reflect all available information that is relevant to the valuation of securities.

11 E. Fama classified the pricing effciency of a market into three forms: weak, semi-strong and strong. E. Fama classified the pricing effciency of a market into three forms: weak, semi-strong and strong. Weak form efficiency: the price of the security reflects the past price and trading history of the security. Weak form efficiency: the price of the security reflects the past price and trading history of the security. Semi-strong form efficieny: In addition to the historical price, the price of the security fully reflects all publicly available information. Semi-strong form efficieny: In addition to the historical price, the price of the security fully reflects all publicly available information. Strong form efficieny: the price reflects all information that is available and unavailable publicly. Strong form efficieny: the price reflects all information that is available and unavailable publicly.


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