Financial Markets and Institutions: Chapter 12

Chapter 12 Market Microstructure and Strategies: describe the common types of stock transactions, explain how stock transactions are executed, describe the regulation of stock transactions, explain how barriers to international stock transactions have been reduced.
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Financial Markets and Institutions: Chapter 12 FinancialMarketsandInstitutions Abridged10thEdition by Jeff Madura © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.1 Market Microstructure and 12 Strategies ChapterObjectives ■ describethecommontypesofstocktransactions ■ explainhowstocktransactionsareexecuted ■ describetheregulationofstocktransactions ■ explainhowbarrierstointernationalstock transactionshavebeenreduced © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.2 Stock Market Transactions PlacinganOrderToplaceanordertobuyorsellaspecificstock,aninvestor contactsabrokeragefirm. ■ Theinvestorcommunicatestheordertothebrokerbyspecifying(1) thenameofthestock,(2)whethertobuyorsellthatstock,(3)the numberofsharestobeboughtorsold,and(4)whethertheorderisa marketoralimitorder. ■ Brokermayprovideabidquoteiftheinvestorwantstosellastock oranaskquoteiftheinvestorwantstobuyastock. ■ AMarketOrderisexecutedatthebestpossibleprice. ■ ALimitOrderplacesalimitonthepriceatwhichastockcanbe purchasedorsold.3 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stock Market Transactions PlacinganOrder(Cont.) ■ StopLossOrdertoprotectgainsortolimitlosses. ■ Investorspecifiesasellingpricethatisbelowthecurrentmarketpriceofthe stock. ■ Whenthestockpricedropstothespecifiedlevel,thestoplossorderbecomesa marketorder. ■ StopBuyOrder ■ Investorspecifiesapurchasepricethatisabovethecurrentmarketprice. ■ Whenthestockpricerisestothespecifiedlevel,thestopbuyorderbecomesa marketorder.4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stock Market Transactions PlacinganOrder(Cont.) ■ PlacinganOrderOnline ■ ManyInternetbrokersacceptordersonline,providerealtimequotes,andprovide accesstoinformationaboutstocks. ■ Someonlinebrokerageservicesofferzerocommissiontrades.However,investors mustmaintainacertainamountoffundsintheirbrokerageaccounts.5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stock Market Transactions MarginTrading ■ Investorsusecashalongwithfundsborrowedfromtheirbrokerto makethepurchase. ■ TheFederalReserveimposesinitialmarginrequirements,which representtheminimumproportionoffundsthatmustbecoveredwith cash(currently50%). ■ Investorsmustestablishanaccount(calledamarginaccount)with theirbroker. ■ Overtime,themarketvalueofthestockwillchange.Investorsare subjecttoamaintenancemargin,whichistheminimumproportion ofequitythataninvestormustmaintainintheaccountasaproportion ofthemarketvalueofthestock(currently25%).6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Stock Market Transactions MarginTrading ■ MarginCalls ■ Alargevolumeofmarginlendingexposesthestockmarketstoapotentialcrisis. ■ Ahighvolumeofmargincallsresultsin ...