Investment and Portfolio Management

Where securities are traded:

Secondary Markets
Securities are traded in secondary markets. Secondary markets are those where already issued
securities are bought and sold by members. An exchange provides a facility for its members
to trade securities, and only members of he exchanges may trade there. Therefore,
membership or seat on stock exchange is valuable assets. The majority of the seats are
commission broker seats, most of which are own by the large full service brokerage firms.
The exchange members charges investors for executing trade on their behalf. The commission
that member can earn through this activity determine the market value of the seat. A seat on
NYSE has sold over the years for as little as $4,000 (in 1978) and as much as $2,650,000 (in
1999).
The NYSE is the largest single exchange. The shares of more than 3,000 firms trade there,
and daily trading volume is 1.04 billion shares in 2002. American stock exchange is national
in scope and smaller than NYSE.
Karachi Stock Exchange was established on September 18, 1947 and was incorporated on
March 10, 1949. It started with 5 companies and total paid up capital of Rs. 37 million. As of
December 8, 2009, 652 companies were listed with the market capitalization of Rs. 2.561
trillion (US$ 30.5 Billion) having listed capital of Rs. 717.3 billion (US$ 12 billion). On
December 26, 2007, the KSE 100 Index reached its highest value ever and closed at 14,814.85
points.
Over the Counter Market (OTC)
An informal network of the brokers and dealers who negotiate sales of securities. OTC market
is not a formal market. There are no membership requirements for trading or listing
requirements for securities. Thousand of dealers are listed with SEC as dealers in OTC
securities. Securities dealers quote the prices on which they are willing to buy or sell
securities. In 19971, the National Association of Securities Dealers Automatic Quotation
System (NASDAQ) was developed to offer via computer-linked system immediate
information on bid and ask prices for stocks offered by various dealers.
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The Bid price is the price at which a dealer is willing to purchase the security and Ask price is
the one at which the dealer will sell a security. Hence the ask price is always higher than a bid
price, and the difference, the bid-ask spread, makes up the dealer’s profit.
Trading on exchanges:
The participants:
The investor place an order with a broker. The brokerage firm which owns the seat on the
exchange, contacts its commission broker, who is on the floor of the exchange, to execute the
order. When the firm’s commission brokers are overloaded and have too many orders to
handle, they will use services of floor brokers, who are independent members of the
exchanges and own seats to execute order.
The specialist is central to the trading process. All trading in a given stock places at one
location on the floor of the exchange called the specialist’s post. At the specialist post’s is a
monitor called the display Book that presents all the current offers from the interested traders
to buy or sell shares at various prices a swell as the number of shares these quotes are good
for. The specialists manage the trading in the exchange.
Types of Orders:
When investors place orders to buy or sell securities, they expect their instructions to be
precisely understood by the people involved in processing the order. A number of standard
packets of instructions are used in the brokerage business to aid in this process.
1. Market Order:
Market orders are simply buying or sell orders that are to be executed immediately at current
market prices. For example an investor might call his broker for and ask for market price of
IBM. The retail broker will wire this request to the commission broker
The most common type of order is the market order. With this order, the investor trusts the
Fair pricing function of the marketplace. The broker is to buy or sell at the best price executed
as soon as possible.
Market orders are to be executed as soon as possible after reaching the exchange floor.
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2. Limit Order:
Sometimes an investor is not willing to trade at the market price, preferring to set his or her
own price and not trade until that price is obtainable. In limit orders the investors specify
prices at which they are willing to buy or sell security. Suppose IBM is selling at 98 than;
In Buy limit order may instruct the broker to buy the stock if and when the share prices falls
below 97. Correspondingly, a limit sale order instructs the broker to sell as soon as the stock
price goes above the specified limit.
Stop-loss orders are similar to limit orders in that the trade is not executed unless the stock
hits a price limit. As the name suggests the order lets the stock be sold to stop further losses.
Similarly, stop buy orders specify that a stock should be bought when its prices rises above
the limit.
Day orders expire at the close of business if they are not executed. GTC (Good till canceled)
orders remain open either until they are executed or the investor cancels them. Limit orders
are useful, but they should be used reasonably. A limit order with a limit price distant from
the prevailing market price is said to be away from the market.
Limit order must specify a price and a time limit.

Limit orders

Conditions

Price below the limit Price above the limit

A
c Buy
t
i Limit buy order Stop buy order
o
n
Sell
Stop-loss order Limit sell order