TOPIC V: SECURITIES

MARKETS / INVESTMENT
MARKETS

Securities Markets and Mechanics of

investing in securities
 Securities Markets
 One way in which securities markets may be
classified is by the types of securities bought and
sold there. The broadest classification is based
upon whether the securities are new issues or are
already outstanding and owned by investors.
 New issues are made available in the primary
markets, securities that are already outstanding
and owned by investors are usually bought and
sold through the secondary markets.
Securities Markets (continuation)

 Another classification in by maturity:

Securities with maturities of one year or
less normally trade in the money market;
those with maturities of more than one
year are bought and sold in the capital
market.
2.1 Primary Markets
 Securities available for the first time are
offered through the primary securities
markets. The issuer may be a brand-new
company or one that has been in business for
many years.
 The securities offered may be a new type for
the issuer or additional amounts of a security
used frequently in the past.
2.1 Primary Markets (Cont..)
 The key is that these securities absorb new
funds for the coffers of the issuer, whereas in
the secondary markets, existing securities are
simply being transferred between parties, and
the issuer is not receiving new funds.
 After their purchase in the primary market,
securities are traded subsequently in the
secondary markets.
Primary Markets (Continuation)

 Billions of dollars worth of new securities

reach the market each year.
 The traditional middleman in the primary
markets is called an investment banker.
 The investment banker’s principal activity is
to bring sellers and buyers together, thus
creating a market.
Primary Markets (Continuation)

 He normally buys the new issue from the

issuer at an agreed upon price and hopes to
resell it to the Issue means to officially
produce something such as new stamps,
services, or stocks and make them available
for people to buy.
Primary Markets (Continuation)
 In this capacity, investment bankers join to
underwrite, or guarantee, an issue.
 Usually a group of investment bankers join to
underwrite a security offering and form what is
called an underwriting syndicate.
 The commission received by the investment
banker in this case is the differential, or spread,
between his purchase and resale prices. The risk
to the underwriter is that the issue may not attract
buyers at a positive differential.
2.1.1 Buying new issues

 In marketing goods, we traditionally think of the

marketing channel comprising the manufacturer,
wholesaler, and retailer.
 In the primary markets for securities, the issuer can
be thought of as the manufacturer.
 The investment banker serves the wholesaling
function in the channel of distribution. He will
locate and do business with buyers through retail
outlets.
 These retail outlets are what we know as brokerage
firms.
 Many investment bankers also serve as brokers and
dealers; that is, they both underwrite and distribute
shares to ultimate buyers.
2.1.1 Buying new issues(Cont..)
 Wholesale means the business of selling
goods in large quantities to other businesses.
 Retail means the sale of goods in stores to
customers, for their own use and not for
selling to anyone else.
 Broker means to help two groups agree on
and arrange the details of a formal
agreement, or someone whose job is to buy
and sell property, insurance, etc for someone
else.
2.1.1 Buying new issues
(continuation)
 Investors are informed of new issues in a
formal way through a prospectus, a summary
of important facts relative to the company and
the securities being offered.
 The document is intended to ensure that
potential investors are fully apprised of all
important facts that may bear upon the value
of the securities. In an informal sense, new
issues are available only through those firms
that are a part of retail distribution group.
 2.1.2 Attraction of new issues

 New stock issues of companies whose shares are

already publicly traded are normally offered a
price very near those of the companies’ existing
shares.
 The area of the new issues market that generates
the most excitement and publicity concerns
companies coming to the public market for the first
time.
 Because these companies do not have publicly
traded shares, investors and speculators are keen
to test their assessment of the value of the new
shares against the offering price.
2.1.2 Attraction of new issues

 New issues are attractive to many because no

brokerage commissions are charged to
investors when these shares are purchased.
 The brokerage fees consist of the spread
between the price paid to the issuer by the
investment banker and the resale price to the
public.
 Regular commissions, however, are paid upon
the sale of these shares.
2.2 Secondary Market
 Once new issues have been purchased by
investors, they change hands in the secondary
markets.
 There are actually 2 broad segments of the
secondary markets:
1) the organized exchanges and
2) the over-the-counter (OTC) market.
2.2.1 Organized Exchanges

 Organized exchanges are physical

marketplaces where the agents of buyers and
sellers operate through the auction process.
There are a number of organized exchanges.
Most are truly national marketplaces, and the
others are regional or local.
 The largest and best-known national exchange
is the New York Stock Exchange (NYSE)
Major stock exchanges
 Major European examples of stock exchanges
include the Amsterdam Stock Exchange,
London Stock Exchange, Paris Bourse, and
the Deutsche Börse (Frankfurt Stock
Exchange).
 In Africa, examples include Nigerian Stock
Exchange, (JSE) Johannesburg Stock
Exchange Limited, etc.
Major stock exchanges (Cont..)

 Asian examples include the Singapore

Exchange, the Tokyo Stock Exchange, the
Hong Kong Stock Exchange, the Shanghai
Stock Exchange, and the Bombay Stock
Exchange.
 In Latin America, there are such exchanges as
the BM&F Bovespa and the BMV(Bolsa
Mexicana de Valores or the Mexican stock
exchange).
2.2.1.1 What shares are traded?

 Each exchange lists certain stocks for trading.

On the national exchanges, only these shares
are traded.
 The NYSE has long enjoyed a reputation as
the place where large, seasoned companies are
listed for trading.
2.2.1.1 What shares are traded? (Cont..)
 Certain strict standards must be met and fees
paid for initial and continued listing.
 The initial listing requirements concentrate
on minimum demonstrated earnings, asset
size, number of shares outstanding, and
number of shareholders.
 Continued listing is dependent upon number
of holders, number of public holders, and
aggregate market value of shares.
2.2.1.1 What shares are traded? (Cont)

 Not all companies qualify for listing on the

NYSE.
 Some qualify but do not wish to be listed,
perhaps because they do not want wider
distribution of their shares or do not want to
meet the requirements concerning disclosure
of their affairs.
2.2.1.1 What shares are traded?
(Cont)
 In any event, listing brings certain advantages
to companies as well as their shareholders.
Investors get reasonably full and timely
information on the company, constant price
quotations, and all the benefits and safeguards
built into exchange requirements for
continued listings.
 The prestige and publicity associated with
listing will have an influence on the
company’s future financing and its products.
2.2.1.2 Membership on the exchange
 Only members of the exchange may
participate in trading its listed securities on
the floor of the exchange. Being a member is
often referred to as having a seat on the
exchange.
 Seats or memberships are bought and sold
each year, and the board of governors of the
exchange must approve all such transfers of
exchange membership.
 Over the years, seats have sold for amounts
from as low as $17,000 to more than $1 million
in US.
2.2.1.2 Membership on the exchange
(Cont)
 Members perform various functions.
 According to these functions, they are classified as
 commission brokers,
 floor brokers,
 odd-lot dealers,
 registered traders,
 specialists, and
 bond brokers.
 Commission Brokers. About one-half the members of NYSE are
commission brokers, primarily concerned executing customer
orders to buy and sell on the exchange. They receive commissions
for such executions. Prominent commission brokers include firms
that are qualified for that activity, and many firms may have more
than one membership.
2.2.1.2 Membership on the exchange
(Cont)
 Commission Brokers. They are primarily
concerned with executing customer orders to
buy and sell on the exchange.
 They receive commissions for such executions.
Prominent commission brokers include firms
that are qualified for that activity, and many
firms may have more than one membership.
 About one-half the members of NYSE are
commission brokers.
2.2.1.2 Membership on the exchange
(Cont)
 Floor brokers. When a commission broker
has orders that he cannot execute
personally because of their number or
because of the activity of the market, he
engages the services of a floor broker.
2.2.1.2 Membership on the exchange
(Cont)
 Odd-lot dealers. Trading on the floor of the
exchange is conducted in round, or full, lots of 100
shares.
 Many investors and speculators buy and sell in
lots of less than 100 shares, are called odd lots.
 Odd-lot trades must be executed through an odd-
lot dealer who supplies commission brokers, or
buys from them, any number of shares less than a
round lot.
 Odd-lot orders account for more than one-third of
all orders in NYSE.
2.2.1.2 Membership on the exchange
(Cont)
 Registered traders. Some of the members of
the exchange trade for themselves; they do not
engage in business for the public or for other
members. These registered traders roam (walk
or travel for a long time, with no clear
purpose) the floor of the exchange in search of
buying and selling opportunities. One
moment they may buy a stock, only to sell it
shortly thereafter.
2.2.1.2 Membership on the
exchange (Cont)
 A trader’s profits depend upon the size and
rapidity of his turnover (rate at which a
particular type of goods is sold) of stock and on
the accuracy of his estimate of future price
movements.
 Traders pay no commissions and can afford to
take narrower margins than others do. They are
subject to myriad rules and regulations
governing their activities, owing to their special
status.
2.2.1.2 Membership on the exchange
(Cont)
 Specialists. One-fourth of the membership of the
exchange function is specialists. Specialists now
also handle odd-lot orders.
 The most attractive and important feature of a
stock exchange listing is marketability at fair and
reasonable prices.
 Toward this objective, one category of members
has been delegated with responsibility for
ensuring that each listed stock experiences an
“orderly succession of prices”.
2.2.1.2 Membership on the exchange
(Cont)
 These members are known as specialists. Each
stock issue traded on an exchange is assigned
a specialist to supervise and conduct an
equitable market for that security. To
perform this function, a specialist is obliged to
act in a dual capacity, as agent and as
principal.
2.2.1.2 Membership on the
exchange (Cont)
 Today each specialist firm controls all the
trading in one or more stocks or options.
There is an ordinarily only one specialist firm
to a stock. When new stock are listed,
specialists apply for them, and an allocation
committee makes the assignments based upon
the grading of the specialist firms by the
brokerage houses.
 2.2.1.3 Listed stock tables

 The regular source of reference for basic stock price

and volume information is stock tables appearing in
major newspapers throughout the country.
 The style and statistical information table used for
stocks listed on the NYSE are provided by the
associated press. The format is, therefore, uniform
throughout the country. Issues that have traded
each day are recorded in alphabetical order and
appear as shown on the portion of the tables below.
2.2.2 The Over-the-Counter (OTC)
Market
 The OTC market is not a central physical
marketplace but a collection of broker-dealers
scattered across the country.
 This market is more a way of doing business
than a place.
 Buying and selling interests in unlisted stocks
are matched not through the auction process
on the floor of an exchange but through
negotiated bidding, over a massive network
of telephone and teletype wires that links
thousands of securities firms here and abroad.
2.2.2 The Over-the-Counter (OTC)
Market (Continuation)
 OTC market is really a group of markets, each
tending to specialize in certain securities.
 The first of these markets deals in the
securities of the U.S Treasury and government
agencies. The second encompasses the trading
in municipal bonds, etc. (in USA).
2.2.2 The Over-the-Counter (OTC)
Market (Continuation)
 OTC activity is both wholesale and retail in
character. The participants are brokers and
dealers.
 A wholesale dealer buys and sells for his own
account and from or to professionals. These
dealers “make markets” by standing ready to buy
or to sell securities.
 Individual investors deal with retail firms. For
example, if you wish to buy an OTC stock, your
brokerage firm might buy the stock from a
wholesale dealer for its own account and resell it
to you at a slightly higher price. In this case, your
firm is functioning as a dealer.
2.2.2 The Over-the-Counter (OTC)
Market (Continuation)
 The main difference between organised
exchanges and OTC markets is that buyers
and sellers of listed stocks meet through
brokers on the floor of an exchange and arrive
at prices by auction process.
 OTC transactions are effected within or
between the offices of securities houses, and
prices arrived at by negotiation.