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B Chapter 12
B Chapter 12
Chapter Objectives
Describe typical common stock transactions and their execution Explain the role of electronic communications networks (ECNs) Describe the regulation of stock transactions Explain how barriers to international stock transactions have been reduced
Market order to buy/sell at the best possible price Limit order is a market order with a specific price maximum or minimum Discount vs. full-service broker Placing an order via the Internet
Margin Trading
Buying stock on margin= borrowing to buy stock Federal Reserve sets margin requirements (%) or proportion of funds buyer must put down
Used to dampen speculation and market crashes Currently 50%; half down, half borrowed Broker may set higher margin requirements
Customer establishes account with broker (margin account) Initial marginbrokers minimum margin requirement for stock purchase Maintenance marginminimum proportion of equity/total value of stock borrowing period
Margin Call
Stock price falls below maintenance margin requirements Margin call is a request for cash to maintain maintenance margin Broker/lender may sell stock to protect loan
Short Selling
In a short sale, investor borrows and sells stock Promises to pay back stock later Short seller hopes stock price declines to provide gain Short seller covers dividend payments while borrowing stock Limited gain; unlimited losses Short Interest Ratio as market forecast
Share price adjusts in response to change in index Pay dividends earned in added shares Lower management fees than actively managed mutual funds May be traded on an exchange any time during the day May be purchased on margin and sold short Capital gains tax only Value of ETF shares = underlying value of shares Investor must pay transaction costs when buying/selling
Cube (QQQ)
Tracks Nasdaq100 index Traded on Amex Investors may speculate on future of technology stocks
Purchase Sell
on margin
short
Market-Makers
Specialists
Floor brokers fulfill trade orders on exchange trading floor May work for the brokerage house or serve as their agent Completes the physical trade with other floor participants
Specialists serve as brokers, matching buy/sell orders in a few, specific stocks on the exchange Serve as a dealer, buying/selling to complete transaction Serve to maintain fair and orderly market
Program Trading
Trading completed by computer program Initial use with institutional, large order, high volume to take advantage of technology NYSE listed stocks dominate program trading Trading a function of parameters set in program, such as over-valued shares Used also to manage portfolio risk
Portfolio insuranceuse of stock index futures Protect gain or minimize loss in portfolio
Program trading associated with increased volatility of stock market or inciting significant market declines
Research has refuted claim that program trading has increased stock market volatility Has not been the initial starter of sharp market declines
NYSE implemented collars or curbs to program trading in volatile periods Circuit breakersmarket time out
Securities Act of 1933 and SEC Act of 1934 SEC uses surveillance system to watch trading
Five Commissioners
Appointed by president Confirmed by Senate
Requires corporations to disclose relevant information broadly to investors at the same time Forbade old practice of providing selected analysts new information during teleconference calls Company Web siteWeb cast 8-k form filing News release Above simultaneously with conference call
Recommend buy or sell Few sell recommendations before collapse of Internet companies
Do analysts tout stocks after they are aware of negative information? Should analysts high income be shared with investors who lost money in stock?
Information Costs