Chapter 18. The Common Stock Market.ppt

Chapter 18. The Common Stock Market Types of markets Trading mechanics Stock market indexes Pricing efficiency Common stock equity security ownership entitled to distributed earnings entitled to share of assets I. Type of Markets exchanges OTC trading of unlisted stocks listed stocks direct trading Exchanges physical location for trading trading by members own a seat on the exchange stock traded on exchange are listed stocks NYSE the “Big Board” about 2800 listed U.S. companies 450 non-U.S. companies $18 trillion market value (2/04) 1366 seats (fixed) seat price $2 million 2002 10/2003 $1.35 million stocks trade at post on the trading floor 20 posts, trading about 100 stocks each stock has one specialist 10 specialist firms, 470 specialists each specialist has 5-10 stocks process trades from floor brokers (5%) and electronically (95%) role of the specialist MUST maintain a fair and orderly market for stock act as buyer or seller as needed (10% of trades) match buyers and sellers maintain order priority the future of the specialist may be phased on with next 5-10 years recent SEC fines for improper trading for several major firms AMEX merged w/ Nasdaq 1998 specializes in equity derivative securities and closed-end funds Regional exchanges stocks may be listed on both NYSE and regional exchange 5 regional exchanges cheaper seat prices OTC markets electronic network of dealers all over the world ECNs electronic communication networks more than one dealer per stock not obligated to make a market Nasdaq not the only OTC system, but the largest over 4000 companies listed mkt. value $2 trillion (2/28/03) leader in daily share volume over 500 dealers listing requirements II. Trading Mechanics types of orders short selling buying on the margin institutional trading Types of orders instructions from investors to brokers market order buy/sell order to be executed at best price -- get lowest price for buy order -- get highest price for sell order market order (cont.)