CHAPTER FOUR

Securities Markets
 Learning Objectives

● To distinguish between primary and

secondary markets
● To describe how the equity markets are
organized and how they operate
● To explain what we mean by the third and
fourth markets
● To state the major stock market indicators
 Financial Market
● Financial Market refers to a conceptual mechanism by
which surplus units and deficit units get together. It is
a system comprised of individuals and institutions,
instruments and procedures that bring together
borrowers and savers, no matter the location.

● A Financial Market is a market in which financial

assets (securities) such as stocks and bonds are
traded (purchased or sold) through the interaction of
the buyers (Investors) and the sellers (Issuers).

● Financial Markets facilitate the flow of funds from

surplus units to deficit units.
The Role of Financial Markets

● Help firms and governments raise cash

by selling securities
● Channel funds from savers to borrowers
● Provide a place where investors can act
on their beliefs
● Help allocate cash to where it is most
productive
● Help lower the cost of exchange
 Primary Markets
● New securities are issued in a primary market
– Initial public offering (IPO) versus “seasoned” new
issue
● Primary Market facilitates the issuance and
sale of new securities.
● Issue facilitated by investment dealers
– Specialists in advice, design, and sales
– Intermediaries between issuer and investor
 Issuer

Originating Investment Banker

Underwriting Syndicate Group of Investment Banker

Selling Group Composed of

Underwriting Syndicate plus any selected retail brokerage houses

Investors

Figure 1: A primary offering of securities: Syndicated Offering

 Investment Banker
● Firm specializing in the sale of new securities to the
public
● Client advice includes type and features of security,
offer price, and timing of sale
Underwriting services:
The process by which investment bankers purchase an
issue of securities from a firm and resell it to the public
Risk of selling to investors assumed from issuer
Investment bankers are compensated by the spread:
securities are purchased at a discount
● Coordinate marketing by helping issuer register
securities, issue prospectus, and sell securities
 Secondary Markets
● Markets where investors trade previously
issued securities
● Transaction in this market does not provide
anything to the issuing firm.
● Auction markets involve bidding in a specific
physical location
– Brokers represent investors for a fee
– Others trade for their own account
● Negotiated markets consist of decentralized
dealer network
 Stock Exchanges
● New York Stock Exchange is the largest
secondary market in the world
● Dhaka Stock Exchange
– First incorporated as East Pakistan Stock Exchange
Association Ltd 1954
– Renamed as Dacca Stock Exchange Ltd in 13th May
1964.
– After the liberation warAfter the liberation war in
1971 the trading was discontinued for five years.
– In 1976 trading restarted in Bangladesh.

● Chittagong Stock Exchange

– Established in 1995 as the second stock exchange of the
country.
 Over-the-Counter Markets
● Network of dealers standing ready to either buy or
sell securities at specified prices
– Dealers profit from spread between buy and sell prices
– Handle unlisted securities

● NASDAQ-National Association of Security Dealers

(NASD) Stock Market
– Private corporation> expected to go for public
– No specific location
– Fully computerized
 Third and Fourth Markets

● Third Market: Over-the-counter

transactions in securities listed on
organized exchanges
● Fourth market: Trading network among
investors interested in buying and
selling large blocks of stock
– Brokers, dealers bypassed so costs are low
– Electronic or telephone network
 Equity Market Indicators
● Dow Jones Industrial Average
– Composed of 30 “blue-chip” stocks
representing different industries
– Price weighted
● S&P 500 Composite Index
– Composed of 500 “large” firm stocks
– Market value weighted
● Nikkei 225 Average
– Price weighted index of 225 actively-traded
stocks on the Tokyo Stock Exchange
 Bond Markets

● Secondary bond market is primarily an

over-the-counter network of dealers

– Corporate bonds are not as actively traded

as government issues
 Market Developments

● Growth of institutional trading

– Block trading of stocks (transactions of at
least 10,000 shares)
● Affects market structure and operation
– Negotiated, not fixed, commissions
● Globalization of securities markets
– 24-hour trading
– Internet