Securities Markets Reference: Chapter 3 BKM

How Firms Issue Securities  Primary Market: Market for new issues of securities  Secondary Market: Market for already existing securities  There are two types of primary market issues;  IPO  Seasoned  Underwriting: Public offerings of both stocks and bonds typically are marketed by investment bankers who in this role are called underwriters  Firm Commitment vs. Best Efforts  Prospectus: A description of the firm and the security it is issuing

How Firms Issue Securities (continued)  Underwriting Syndicate  Shelf Registration: Register securities and gradually sell them to the public for two years following the initial registration

How Securities are Traded; Types of Markets  Direct Search Markets:  Least organized  Direct seeking by buyers and sellers  Commodity is low-priced, non-standard  Brokered Markets:  Active trading  Brokers have specialized knowledge  “Block Houses”

 Dealer Markets: Markets in which traders specializing in particular assets buy and sell for their own accounts  Dealer’s spread b/w bid and ask prices  OTC is an example  Auction Markets: A market where all traders meet at one place to buy or sell an asset  Continuous vs. Periodic How Securities are Traded; Types of Markets (continued)

Types of Brokers  Full service brokers are firms offering information (on different securities) and advice (for selling and/or buying) apart from usual services.  Discount brokers are firms offering less (or no) research services and will charge less.  Online brokers offer much similar services as full service brokers but trade interfaces are available to clients for online trading.

 Dealing or execution only, i.e., your broker deals for you and executes your instructions.  Advisory means the broker will offer you advice on buying, selling, or holding a specific scrip.  Discretionary; Broker takes all the buying and selling decisions, informs you regularly regarding your portfolio. Types of Brokers (at KSE)

 Cash account authorizes a customer for cash transactions only.  Margin account authorizes a customer to transact for a value greater than the available cash, i.e., use a loan.  Asset management account are unique, i.e., offering services such as investment of cash balances in funds and check writing facilities etc.  Wrap accounts are special types of accounts accumulating all costs in one fee. Types of Brokerage Accounts

 Bid price is the price at which a dealer or other trader is willing to purchase a security  Ask price is the price at which a dealer or other trader will sell a security  Bid-Ask spread is the difference between a dealer’s bid and asked price How Securities are Traded; Types of Orders

 Commission charged by the broker depends upon;  Price of a security;  Market in which the security is traded, etc.  0.02% of purchase price.  0.005% of sale value (replaced with FED). Costs Associated with Trading

 An order may be classified on the basis of;  Type of transaction (e.g., buy or sell)  Price (e.g., market or limit)  Duration/Time (e.g., day or good till cancelled)  Orders may be placed through phone, in written, or online. Placing Orders for Trading

 Bid (buy) order is placed if an investor wants to buy securities.  Offer (sell) order is placed if an investor wants to sell securities.  Short sale is the sale of borrowed stocks with the hope of returning them at lower prices.  Buy to cover is the sale executed to close out a short position.

 Both bid & offer orders are;  Market or at Best orders, or  Limit orders, and/or  Stop orders  Limit order specifies a limit for the purchase (in bid order) or sale (in offer order) price.  An order is a market order if no price (purchase or sale) is specified by investor and is executed at available best market price.  An order to buy or sell a security when its price crosses the specified level is called stop order. Placing Orders for Trading

 Orders may have Time in Force Restriction, i.e.,  Day (market orders are always day orders)  Good Till Cancelled (GTC) (i.e. Open)  Good to Date (Month-Day-Year) (GTD)  Good for Week (GTW)  Good for Month (GTM)  Fill or Kill (FOK) (placed outside market hours, and executed in the immediate next trading session)

 Limit orders are ranked on the basis of price first, i.e., highest price in buy orders and lowest price in sell orders are settled first, and then on first come & first serve basis, i.e., two orders with same price will be ranked on which order reached the exchange floor first.  Limit orders will be executed only if the specified prices are available.  Unsettled limit orders are queued for future execution (up to 90 days) and do not lose priority.  Volume of the limit orders may not match for settlement. Sorting Orders

 Market orders are settled with the top limit order.  If partially completed the market order is fulfilled from the next available limit order in the queue.  Must be executed immediately. Sorting Orders

 Stop orders are of two main types;  Stop Buy Order  Stop Loss Order  Stop buy order specifies a price which if breached triggers buying.  Used by momentum traders who wish to take advantage when the stock price has moved upwards past a threshold level indicating upward momentum that is expected to continue. Sorting Orders

 Stop loss order is an order to sell stock if the price lowers than the specified price.  Useful when investor wants to limit losses, especially during short selling. Sorting Orders

 Following terminologies are often encountered in trading;  Tick Size; the minimum amount that a price of stock may change by. It is one paisa at KSE.  Circuit Breakers/Locks; Level at which trades are stopped in a particular scrip. At KSE trading is restricted in upper & lower limits of 5% or Re. 1/-, whichever is higher/lower, from last closing price.  Market Lot; Minimum tradable quantity of shares. Sorting Orders

Execution of Orders on Trade Screen  A partial trade screen looks like;  Hypothesize a company with a ticker/symbol XYZ. SymbolBid VolumeBid PriceAsk VolumeAsk Price SymbolBid VolumeBid PriceAsk VolumeAsk Price XYZ

Execution of Orders on Trade Screen  Investor A wants to buy 1000 shares of Rs (a limit order);  Investor B wants to sell 500 shares of Rs (a limit order) S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ

Execution of Orders on Trade Screen  A bid (buy) market order for 250 shares of XYZ reaches;  A sell (ask) market order for 500 shares reaches; S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ

Execution of Orders on Trade Screen  A bid limit order reaches of 500 Rs per share;  A sell (ask) limit order for 500 Rs per share reaches S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ XYZ S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ XYZ

Execution of Orders on Trade Screen  Following orders reach the exchange;  Bid limit order of 500 Rs , and  Ask limit order of 250 Rs Prices are matching but quantities are not. 250 Rs will be transferred to the bid trader. S. No. SymbolBid VolumeBid PriceAsk VolumeAsk Price 1XYZ XYZ XYZ