Bodie - Essentials - of - Investments - 11e - Chapter03 - PPT MOD - Fall2020

Chapter
3 Security Markets
Bodie, Kane, and Marcus

Essentials of Investments
Eleventh Edition
OUTLINE
• IPO
• TYPES OF MARKETS AND ORDERS (Market orders, limit orders)
• SHORT SELLING
• BUYING ON MARGIN
3.1 How Firms Issue Securities: Primary Vs. Secondary
• Primary market
– New issue (stocks or bonds) is created and sold -->issuing firm

receives the proceeds from the sale
– Public offerings issued by publicly traded companies: registered
with the SEC and sold to the public
– Private offerings issued by privately held companies: not
registered, sold to only a limited number of investors (Up to 2000
shareholders with restrictions on resale)
• Secondary market
– Existing owner sells to another party

– Issuing firm doesn’t receive proceeds and is not directly involved
3.1 How Firms Issue Securities: IPO
• IPO (Initial public offering): First issue/ sale of securities to the
public When a company decides to go public.
• Public offerings of stocks are managed by investment bankers who

in this role are called underwriters. More than one investment
banker may be involved in case of a large company.
$15 $13: create demand across invest
Investment And therefore this will help the inve
banker (s) sell the new shares
Issuing With one Investors
Firm lead
underwiter $15: This will make the selling job o
banker harder the investment ba
higher fees
 Investment bankers help and advise an issuing firm on the prices it
can charge for the newly issued securities & handles the marketing
job. They purchase securities from issuing company and resell
them to the public. 4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
• Initial Public Offerings process:
1- A preliminary registration statement must be filed

with the SEC, describing the firm and the security
being issued, which is also called the ‘Prospectus’.
2- Issuing firm and underwriter ( investment bank) go

on “road show”: they travel around the country to
publicize the offering.
• Purpose: Bookbuilding and pricing
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5
 Road trip generates interest among potential
investors and provide information about the offering.
 Road trip provides valuable information about the
price at which the stocks could be sold 
bookbuilding and setting final offer price by the
underwiter. $15
$13
INVESTMENT BANKER JOB TO SELL THE NEW
ISSUE TO THE PUBLIC HARDER higher fees
3- Investment banker purchase securities from issuing
firm and resell them to investors
• Underwiter( invest bank.) receives explicit fees from the issuer
as a compensation
• Implicit cost of IPO : Underpricing
IPOs commonly are underpriced, so it’s easier to market issue

(increase the demand for the issue) but it is costly to the issuing
firm.
Price jumps occur on the date when the shares are first traded in
markets. Post-initial sale returns average 10% or more
—“winner’s curse”
 Underpricing may be a good strategy for the company
Without it, the underwriters would need to spend more
resources in order to place the issue with the public. The
investment banker would then need to charge higher explicit
fees to the issuing firm.
• Company has two types of costs for the
IPO:
• EXPLICIT COST IPO = fees that will be
paid to the investment bank
• Implicit cost IPO = underpricing of the new

shares that will be sold to the public
Figure 3.1 Relationship among a Firm Issuing Securities, the Underwriters,
and the Public
Figure 3.2 Average First-Day Returns
An issue of additional shares of stock to the public
by a corporation would be called an SEO
(Seasoned Equity Offering).
Financial Markets
3.2 Functions of Financial Markets
Overall purpose: facilitate low cost investment
1. Bring together buyers and sellers at low cost
2. Provide adequate liquidity by minimizing time and

cost to trade and promoting price continuity.
3. Set & update prices of financial assets
Reduces information costs associated with investing
3.2 Types of Markets
• Dealer Markets
• Dealer purchase assets on its own account and then
resell them for a profit (spread); the buying and selling
is done by the dealer at its own risk.
• Auction Markets
• Brokers and dealers trade in one location
• The primary purpose of an auction market is to match
buyers and sellers.
3.2 Types & nature of Markets
Quote-Driven vs. Order-Driven Markets:
• The quote-driven market only displays the bids and asks

of market makers = dealers. Quote-driven markets are
most commonly found in markets for bonds, currencies,
and commodities. Investors trade at prices quoted by
dealers. The market makers are required to meet their
quoted prices, either buying or selling.
• Bid price $ 50.40 : price received by an investor

from selling a security so it is the price at which
dealer will buy security
• Ask price $50.42 : price paid by the investor to
purchase a security so it is the price at which dealer
will sell security
3.2 Types & nature of Markets
Quote-Driven vs. Order-Driven Markets:
• The order-driven market displays all of the bids and asks

orders of both buyers and sellers are displayed, detailing
the price and the quantities at which they are willing to buy
or sell a security. Order-driven markets use rules to match
buy orders to sell orders submitted by all market
participants. Almost all exchanges use order-driven
trading system
Order-Driven Markets:
- Advantage : transparency
- Disadvantage : no guarantee that they will be executed.
They're just prices investors or traders desire to pay or
receive. The orders will be executed if they are matched.
Bid ASK
ORDER BOOK
FOR
SECURITY ‘X’:
3.2 Types of orders
1- Market orders
Market order is where you just indicate your intention to
buy or sell , the price will be the current market price and
whatever it is, you have to accept.
2- Price-contingent orders
• Limit orders
A limit order is an order where you indicate your intention
(Buy/Sell) & you specify the price. ( within the orderbook)
• Stop orders - goal is to stop losses
3.2 Types of orders
1- Market order:
Market orders are buy or sell orders that are to be
executed immediately at current market best
prices.
Ex: You call your broker and ask for the market price of
Facebook. The broker reports back that the best bid price is
$76.40 and the best ask price is $76.42.
You would need to pay $76.42 to purchase a share and you
could receive $76.40 a share if you wish to sell.
3.2 Types of orders
1- Market order: Complications
Posted price quotes represent commitments to trade up to a
specified number of shares. If the market order is for more
than this number of shares, the order may be filled at multiple
prices.
Ex: You wish to purchase 1,000 shares of FB:

MARKET BUY ORDER the best ask price =
76.42 but the offer is for 400 shares
at this price so it is necessary to pay a slightly higher price (
76.43 for the last 600 shares
3.2 Types of orders
2- Price-contingent orders:
2.1 Limit buy/sell orders: Orders to buy or sell at a specified
price or better.
 Limit buy order instructs the broker to buy some

number of shares if and when they may be obtained at or
below a stipulated price.
 Limit sell order instructs the broker to sell if and when
the stock price rises above a specified price limit.
3.2 Types of orders
Ex: Stock trading at $50,
Investor could place a buy limit at 49.90 order will be

executed if I have a selling order at 49.90 or lower
or a sell limit order at 50.25 order will be executed if I

have a buying order at 50.25 or higher
 The limit order may or may not execute depending

on which way the market price moves.
 A collection of limit orders waiting to be executed
is called a limit order book
The exchange wants the buyer to get the best price for the security and give
seller the best price to sell the security. How to achieve a win-win situation? It’s
pretty simple, match the best bid with the best ask. The best bid is the one
which is the highest price a buyer is willing to pay for the underlying security.
Similarly, the best ask is the lowest price the seller is asking to pay for the
underlying security. The first line is called the “inside quotes”. They are the
highest buy and lowest sell prices orders suggest
Best bid= Limit buy orders Limit sell orders Best bid=
highest selling highest selling
Best ask =
price for me = price for me
lowest buying =
highest buying highest price
price for me =
price the other thelowest
other selling
investor will investor
price forwill
the
pay to buy pay to buy
other investor
from me from me
The first line is called the “inside quotes”.
3.2 Types of orders
2.2 Stop orders:
-Stop-loss orders: becomes a market sell order
when the trigger price is encountered the stock
is to be sold if its price hits or falls below the price
mentioned in the order. As the name suggests, the
order lets the stock be sold to stop further loss.
Ex.: You own stock trading at $40. You could place a
stop loss at $38. The stop loss would become a market
order to sell if the price of the stock hits $38.
3.2 Types of orders
Similarly, stop-buy orders specify that a stock
should be bought when its price hits or rises above
the mentioned price in the order.
E.G.: You need a stock so you could place a

stop buy at $42. The stop buy would become a
market order to buy if the price of the stock hits
$42.
3.4 U.S. Markets
• NASDAQ
• Approximately 3,000 firms
• Dealer market
• New York Stock Exchange (NYSE)

• NYSE is largest U.S. Stock exchange
• Auction market
3.4 U.S. Markets
• ECNs electronic communication networks
BATS Global Markets, NYSE Arca etc.
-Allow participants to post market and limit orders over computer
networks. The limit order book is available to all participants.
- Orders that can be “crossed,” that is, matched against another order,
are done so automatically without requiring the intervention of a broker.
For example, an order to buy a share at a price of $76 or lower will be
immediately executed if there is an outstanding asked price of $76.
Advantages:
-Lower transactions costs (usually < 1¢ per share)
-Speed
-Anonymity
3.5 New Trading Strategies
• Algorithmic Trading: Use of computer programs to make

rapid trading decisions. The algorithm exploits very small
discrepancies in security prices and do cross-market price
comparisons that are well suited to computer analysis.
• High-frequency trading: Computer programs make very

rapid trading decisions for very small profits. High-
frequency traders compete for trades that offer very
small profits. But if those opportunities are numerous
enough, they can accumulate to big money.
3.5 New Trading Strategies
• Dark Pools
• ECNs where participants can buy/sell large
blocks of securities anonymously why?
Many large traders seek anonymity. They fear
that if others see them executing a buy or a sell
program, their intentions will become public and
prices will move against them.
• Blocks: Transactions of at least 10,000 shares
3.7 Trading Costs
• Commission: Fee paid to broker for making
transaction
• Spread: Cost of trading with dealer
• Bid: Price at which dealer will buy from you
• Ask: Price at which dealer will sell to you
Spread = Price Ask  Price Bid

• Combination: On some trades both are
paid
3.8 Buying on Margin
 Cash accounts are brokerage accounts that are
funded with cash before buying securities.
 Margin accounts allow you to borrow
money against the value of the securities (cash) in
your account.
• Buying on margin is borrowing money from a broker
to purchase securities. Part of the purchasing price is
paid in cash and the other part from the loan from
your broker. A margin
account is
Loan created: to
purchase
securities
Own
cashof McGraw-Hill Education.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent 33
• Why for the investors? Investors buy on margin

when they expect prices to increase:
Leverage effect ( but risky!)
A margin
account is
Loan created
Own
cashof McGraw-Hill Education.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent 34
• T=0 Let's look at an investor who wishes to purchase 100 shares of
Company XYZ stock at $50 per share ( MV of shares $5000). He
funds half the purchase price with his own money and the other
half from the broker : cash outlay $2,500 from his own and the
other 2500 loan from his broker= $5000 worth of sh (bought on
margin)
• T=0 If the investor just use his own money he can purchase $50
* 50 shares = $2500 worth of stocks (if the investor bought
securities using his own cash)
• Scenario 1: After a year, the share price doubles to $100. The
investor sells his shares for ($100. *100 shares= $10,000) and
pays back his broker the $2,500 he borrowed for the initial
purchase. Ultimately, he triples his money, making $7,500 on a
$2,500 investment.
• Scenario 1:(50 shares*$100= $5,000). If he sell the stocks he will
collect $5000. he would only have doubled his money, from $2,500
• T=0 Let's look at an investor who purchases 100 shares of
Company XYZ stock at $50 per share ( MV of shares $5000).
He funds half the purchase price with his own money and the
other half from the broker : cash outlay $2,500 from his own
and the other 2500 loan from his broker= $5000 worth of sh
• T=0 If the investor just use his own money he can purchase
$50 * 50 shares = $2500
• Scenario 2: AT T= 1 the share price falls by half, to $25. The
investor sells at a loss and receives ($25 *100 shares=
$2,500. Since this equals the amount he owes his broker, he
loses 100 percent of his investment on the deal.
• T=1 Had he not used margin to make his initial investment,
he still would have lost money, 50 shares*$25=1,250 but he
would only have lost 50 percent of his investment - $1,250
instead of $2,500.
• Why for the broker?
 Securities are kept as collateral for the loan (with
the brokerage house) until the loan is paid.
 Investors must repay the principal + interest
 The % margin is monitored and compared to the
maintenance margin requirement MMR% set by
the broker: the minimum amount of equity that the
account may have  possible margin call.
A margin
Loan account is
created to
Own
purchase
securities
cashof McGraw-Hill
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent Education. 37
3.8 Buying on Margin process
• Initial Margin Requirement (IMR)
• Federal Reserve under Regulation T, limits the extent to
which stock purchases can be financed using margin
loans.
• The current initial margin requirement is 50%, meaning
that at least 50% of the purchase of stocks must be paid
for in cash, with the rest borrowed.
However, this regulation is only a minimum requirement,
where brokers may set their initial margin requirement
higher than 50%.
The IMR is the minimum amount of equity an investor must
pay in cash for his purchase
3.8 Buying on Margin process :
- Buying on margin is borrowing money from a broker to
buy securities. Part of the purchasing price is paid in
cash and the other part from the loan from your
broker.
-IMR% (Initial Margin Requirement): minimum amount of equity an

investor must pay in cash for his purchase.
IMR %=
1 − IMR = Maximum % amount investor can borrow

Purchase of
securities on
Loan margin
Own
3.8 Buying on Margin: EX 1
Initial Margin Requirement (IMR)
Ex: An investor wishes to purchase 100 shares of stocks at
$100 per share MV of stocks =$10,000 worth
• If IMR = = 60%  The IMR is the minimum amount of equity an

investor must pay in cash for his purchase
The investor must pay 60% of his investment in cash

(6000$)
and 40 % by borrowing ( 4000$)
If asked differently :
•You have 6000$ in cash to invest and you used it to buy shares at a price of
$100.
•a. If the initial margin rate on the position is 60%, how many shares can you
purchase?
•IMR %=
•Initial MV =
•Initial MV of stocks purchased= 6,000/0.6=$10,000 worth of shares
Or Initial MV = Number of shares purchased x price

=> Number of shares= $10,000/$100= 100 shares
An investor wants to purchase $10,000 worth of stock at $100
per share ( so he is purchasing 100 shares). He pays $6,000 in
cash and borrow the remaining $4,000 from a broker. The initial
balance sheet looks like this:
• Margin is the net worth of investor's account. It is the equity

in the position calculated as: the Position(Market) Value –
Amount Borrowed = $10 000 – $4000 = $ 6000.
• Initial percentage margin:
% margin = = = 60% at t = 0 = IMR
• Price of stock declines now  The assets in the account fall by

the full decrease in the stock value, as does the equity.
• If the stock value were to fall below $4,000, owners' equity
would become negative, meaning the value of the stock is no
longer sufficient collateral to cover the loan from the broker.
• To guard against this possibility, the broker sets
a maintenance margin = the minimum amount of equity that
the account must have or maintain after the position is
opened. If the percentage margin falls below the maintenance
level %, the broker will issue a margin call. 43
• If the percentage margin falls below the maintenance level
equity falls below the maintenance margin threshold Margin
Call
Notification from broker that you must bring your balance back
by adding cash or securities to the margin account otherwise
the broker may sell securities from the account to close up the
margin loan
 MMR so if Market Value - Borrowed
 MMR
Market Value
then margin call occurs.
• If we solve for market value, a margin call will occur when:
Borrowed
Market Value 
1  MMR
 In the example if MMR = 30%:
Margin % = 3000 / 7000 = 43% > MMR So no margin call
However, if we are at the end of the year and the interest is

due, margin call occurs when:
 MMR
From this equation, we can estimate the price for which we get
a margin call from the broker
3.8 Buying on Margin: EX 2
• X Corp: Stock price = $70
• 50%: Initial margin requirement IMR%
• 40%: Maintenance margin requirement MMR%
• 1000 shares purchased
Initial Position
MV Stock $70,000 Borrowed $35,000
Equity $35,000
• Stock price falls now to $60 per share
• Ending Equity in the position (Remaining margin) =
MV of stocks – Amount Borrowed = $60 000 – $35 000 = $25 000
New Position
Number of Equity $25,000
shares* P
Or we can estimate the gains and losses that occurred and add them
to the INITITAL margin( equity) that we had:
Loss =$10x 1000 share=$10,000
So Remaining Margin= $35,000- $10,000= $25,000
• Do you get a margin call?
Percentage margin=
= $25,000/$60,000 = 41.67%
41.67% > maintenance margin  no margin call
How far can price fall before margin call?
• A margin call will occur when:
• %margin= = MMR
= MMR
= 0.4  P=$58.33 OR LOWER I WILL GET A MARGIN CALL

FROM THE BROKER
Or,
2) Borrowed
Market Value 
1  MMR
Market value = $35,000/(1 – .40) = $58,333
With 1,000 shares, stock price for margin call is $58,333/1,000 =

$58.33
3.8 Buying on Margin: variation margin
 Variation margin : additional amount of cash that you need to
deposit in order to restore your initial margin in case you incurr
a lot of losses and you received a margin call
Suppose the price falls for $58.33  you will get a margin call
 In this case New Position
MV Stock 58333 Borrowed $35,000
Equity $23,333
your remaining margin (equity)= 58333 – 35000 = $23,333 

% margin <=40%= MMR  i will receive a margin call
You must add cash to restore your initial margin otherwise your
position will be closed
 To restore initial margin requirement 50% of MV:
equity should be = 50% x $58,333 = $29,167
you have equity = $23,333
so you owe = $ 5,834 ( how much cash I should put into 51 m
Table 3.1 Illustration of Buying Stock on Margin
Another ex: An investor with 10 000$ is bullish on Fincorp stock, which
is selling for 100$ per share. He borrows an additional 10 000$ from the
broker.
At t = 0 The total investment is thus 20 000$ for 200 shares
( 200 shares* $100 = 20,000). Assuming interest rate on the margin loan
of 9%. What would be the investors’ rate of return if the stock goes up at
year end by 30% ? Or if it goes down by 30%?
1) Net worth change %:

Rate of return =
Or,
2) Rate of return is obtained by: a- estimating and adding losses and

gains from holding the stocks. b- Then dividing the amount obtained
over the initial equity in account
3) Or ex. 24
Position at t=0
Position at t=1
MV Stock $26 000 Borrowed $10 900
(200 shares*$100)
(200 shares*$130)
Equity $10,000
Equity $15 100
 If stock prices goes up at the end of the year by 30%  New price =
$130
1-
• MV of the 200 shares will be = 200 * $130 = $26 000
• The investor should pay off the principal and the interest on the
margin loan : 10 000 * (1+ 9%) = $10 900
• Ending equity in account = 26 000 – 10 900 = $15 100
Rate of return =
15 100 － 10 000
= 51%
10 000
$130
2) Rate of return is obtained by: a- estimating and adding losses and

gains from holding the stocks. b- Then dividing the amount obtained
over the initial equity in account
2- Price increase  Gain = $30 * 200 shares = $6 000
Loss of interest = 10 000 * (9%) = $900
$6000 – $900 = $5100
Rate of return =
= 51%
With dividend?
 If stock prices goes up at the end of the year by 30% . Assuming interest rate
on the margin loan of 9%.  New price = $130 and the stock pays $5
dividend per share at the end of the year
- 2nd method: Price increase  Gain = $30 * 200 shares = $6 000
Loss of interest = 10 000 * (9%) = $900
dividend gain: 200 shares * $5 = $1000
Total gain $6000 – $900 + $1000 = $6100

 Rate of return = = 61%
Position at t=1
MV Stock $26 000 Borrowed $10 900
(200 shares*$130)
Cash dividend $1000 Equity( ending $16,100
200 shares * $5 equity or remaining
$130
3- see exercice 24
% return =
-
= 0.6 – 0.09 = 0.51 = 51%
 If stock prices decrease at the end of the year by 30%  New price
= $70
1-
• MV of the 200 shares will be = 200 shares * $70 = $14 000
• Paying off the principal and the interest on the margin loan :
10 000 * (1+ 9%) = $10 900
• Ending equity in account = $14 000– $10 900 = $3 100
Rate of return =
3 100 － 10 000
=−69 %
10 000
 If stock prices decrease at the end of the year by 30%  New price =
$70
2- Price decrease Loss = $30 * 200 shares = $6 000
Loss of interest = 10 000 * (9%) = $900
-$6 000 - $900 = - $ 6 900
Rate of return =
= -69%
3.9 Short Sales
• In a short sale transaction, the investor
borrows shares from the broker and sells
them on the market. And later the investor
must buy back the shares to replace the loan.
3.9 Short Sales
But why???
• A bearish investor who expects that stock
price will fall , would enter a short sale to profit
from this decline, how?
Investor anticipates share prices will fall so the

shares could be bought back at a lower price
than it is now sold  profit
3.9 Short Sales
• Mechanics: How is it done?

• You borrow stock from broker; you must also post
margin with the broker (cash or securities as a
guarantee in case of loss -rise in prices-)
• Broker sells stock and deposits proceeds and
margin in a margin account (you are not allowed to
withdraw the sale proceeds until you ‘cover’)
• Covering or closing out position: Buy the stock and
broker returns the stock title to the party from
which it was borrowed
3.9 Short Sales
• Required initial margin: Usually 50% but
more for low-priced stocks
If you borrow and sell 7,000$ worth of stocks you
must post at the beginning in the brokerage house:
cash or securities that are worth 3,500$
• Liable for any cash flows (Dividend on stock):

Short sellers must pay the lender of the security
any dividends paid during the short sale
Table 3.2 Cash Flows from Purchasing vs. Short-Selling
*Note: A negative cash flow implies a cash outflow.
3.9 Short Sales: Example
Suppose you are bearish (pessimistic) on Dot Bomb stock, and its market
price is $100 per share. You tell your broker to sell short 1,000 shares.
The broker borrows 1,000 shares either from another customer's account
or from another broker and sell it. The $100,000 cash proceeds from the
short sale are credited to your account.
Suppose the broker has a 50% margin requirement on short sales. This
means you must have other cash or securities in your account worth at
least $50,000 that can serve as margin on the short sale. Let's say that
you have $50,000 in Treasury bills.
Your account with the broker after the short sale (or your personal balance
sheet) will be:
Cash $100,000 Loan (mv of 1000 shares) $100,000

Cash and equivalents $50,000 Equity (remaining margin) $50,000
(T-bills)
Total assets $150,000 Total liab+ equity $150,000
Fluctuates
Equity (now) =Total margin account(total assets) – Market value (borrowed)
= selling price + cash from margin – Market value = $50 000
• The broker has a maintenance margin of 30% on short sales. Will you
receive a margin call if Dot Bomb stock raised to $110 ?
1st method: Total assets remain constant at $150,000

Loan (MV) = 1000 *$110 = $110,000
remaining margin (equity) = $150,00 - $110,000 = $40,000
2nd method: loss of $10 * 1000 = 10 000

remaining margin (equity)= initial equity – loss = 50 000 – 10000 =
$40,000
Margin as %= = $40,000/$110,000 = 36.36%

Since it is higher than the required maintenance margin of 30%, no margin call

What will be your return?
Return = ($40,000 – 50 000/ 50 000)= -20%
• How much can the price of Dot Bomb stock rise before you get a
margin call?
Let P be the price of Dot Bomb stock. The proceeds = 150 000; the
value of the shares you must pay back is 1,000P, and the equity in
your account is $150,000 − 1,000P.
which implies that P = $115.38 per share. If Dot Bomb stock

should rise above $115.38 per share, you will get a margin call, and
you will either have to put up additional cash or cover your short
position by buying shares to replace the ones borrowed.
EX 5:
You sell short 100 shares at $60 per share:
• $6,000 must be pledged to broker (sales proceeds)
• Pledge 50% initial margin ($6,000 * 50% = $3,000)
 there is $9,000 in margin account

At t=0

(T-bills)
• Equity = Total margin account (total asset) – Market value

(borrowed)= 9000 – 6000 = $3000
(T-bills)
• Maintenance margin for short sale of stock is 30% market value. What
price for margin call?
When equity ≤ (.30 x Market value)
so ≤0.30
The equity in your account must be at least 30% of the value of the short position
= 0.3 P=$69.23 or more to get margin call
3.9 Short Sales: Example, Continued
• If this occurs P=$69.23  receive margin call
Remaining Equity = $9,000 − $6,923 = $2,077

Variation margin:
To restore 50% initial margin 50% of MV must be restored:
Equity you should have 0.5 *$6,923
Remaining Equity $2,077
Variation margin : initial margin based on current mv - remaining equity:
You owe 0.5 *$6,923- $2,077 = $1,384.50
Exercices
Exercices
Exercices
bid ASK
50 300
d) if a limit order to sell 300 shares comes in at a price of $50, will it be executed? If not,
what will happen?
Exercices

Bodie - Essentials - of - Investments - 11e - Chapter03 - PPT MOD - Fall2020

Uploaded by

Copyright:

Available Formats

You might also like

Bodie - Essentials - of - Investments - 11e - Chapter03 - PPT MOD - Fall2020

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bodie - Essentials - of - Investments - 11e - Chapter03 - PPT MOD - Fall2020

Uploaded by

Copyright:

Available Formats

Chapter

Bodie, Kane, and Marcus

• TYPES OF MARKETS AND ORDERS (Market orders, limit orders)

– New issue (stocks or bonds) is created and sold -->issuing firm

– Existing owner sells to another party

• Public offerings of stocks are managed by investment bankers who

1- A preliminary registration statement must be filed

2- Issuing firm and underwriter ( investment bank) go

IPOs commonly are underpriced, so it’s easier to market issue

• Implicit cost IPO = underpricing of the new

1. Bring together buyers and sellers at low cost

2. Provide adequate liquidity by minimizing time and

3. Set & update prices of financial assets

Reduces information costs associated with investing

• The quote-driven market only displays the bids and asks

• Bid price $ 50.40 : price received by an investor

• The order-driven market displays all of the bids and asks

Ex: You wish to purchase 1,000 shares of FB:

 Limit buy order instructs the broker to buy some

Investor could place a buy limit at 49.90 order will be

or a sell limit order at 50.25 order will be executed if I

 The limit order may or may not execute depending

E.G.: You need a stock so you could place a

• New York Stock Exchange (NYSE)

• Algorithmic Trading: Use of computer programs to make

• High-frequency trading: Computer programs make very

• Ask: Price at which dealer will sell to you

Spread = Price Ask  Price Bid

• Why for the investors? Investors buy on margin

-IMR% (Initial Margin Requirement): minimum amount of equity an

1 − IMR = Maximum % amount investor can borrow

• If IMR = = 60%  The IMR is the minimum amount of equity an

The investor must pay 60% of his investment in cash

Or Initial MV = Number of shares purchased x price

• Margin is the net worth of investor's account. It is the equity

• Price of stock declines now  The assets in the account fall by

 In the example if MMR = 30%:

Margin % = 3000 / 7000 = 43% > MMR So no margin call

However, if we are at the end of the year and the interest is

• 50%: Initial margin requirement IMR%

• 40%: Maintenance margin requirement MMR%

• 1000 shares purchased

MV of stocks – Amount Borrowed = $60 000 – $35 000 = $25 000

• Do you get a margin call?

41.67% > maintenance margin  no margin call

= 0.4  P=$58.33 OR LOWER I WILL GET A MARGIN CALL

With 1,000 shares, stock price for margin call is $58,333/1,000 =

your remaining margin (equity)= 58333 – 35000 = $23,333 

1) Net worth change %:

2) Rate of return is obtained by: a- estimating and adding losses and

• Ending equity in account = 26 000 – 10 900 = $15 100

2) Rate of return is obtained by: a- estimating and adding losses and

2- Price increase  Gain = $30 * 200 shares = $6 000

Loss of interest = 10 000 * (9%) = $900

$6000 – $900 = $5100

- 2nd method: Price increase  Gain = $30 * 200 shares = $6 000

Loss of interest = 10 000 * (9%) = $900

dividend gain: 200 shares * $5 = $1000