Chapter 18

COMMON STOCK MARKETS: THE US & BANGLADESH

Characteristics of Common Stock

Equity

securities represent an ownership interest in a corporation. Common stockholders are the residual owners.

Right to income Right to assets

Preferred

Stockholders have preference over common stockholders.

Right to fixed dividend

Trading Locations
Stock

Exchanges

Electronic auction system Trading floors auction system Central auction specialist system

Over-The-Counter

Market

no trading floor negotiated system multiple market maker system

Independent

Electronic Network Trading

Systems

Stock Exchanges
In USA l Major Stock Exchanges

In Bangladesh
Dhaka Stock Exchange Chittagong Stock Exchange

NYSE or Big Board AMEX or ASE or Curb Boston, Chicago, Cincinnati, San Francisco, Philadelphia NASDAQ

Regional Stock Exchanges

OTC Market

Major Governing Rules

Securities

Act of 1920 and Securities Exchange Ord, 1969 Public Issue Rule 2006 Companies Act 1994 Dhaka Stock Exchange Listing Regulations Direct Listing Regulation 2006

Categories of traded securities:

exchange listed common stocks, bonds, debentures T Bonds. listed mutual funds . Stock and Index based future contracts special types of derivatives now very popular in India and Pakistan, Hopefully it will be introduced by the end of 2008 in Bangladesh.

Types of Markets in USA

First Market

trading on exchanges of stocks listed on an exchange trading in OTC market of stocks not listed on an exchange trading in OTC market of stocks listed on an exchange private transactions between institutional investors

Second Market

Third Market

Fourth Market

Stock Exchanges
Types

of Formal organizations approved and regulated by the SEC (regulators) to provide trading facilities for eligible securities at auction Members/Shareholders

can only trade listed stocks must buy a seat on the exchange

Listing

requirements

minimum capitalization, shareholder equity, average closing share price, etc.

US Market: NYSE

Centralized continuous auction market Exchange participants:

SuperDot Major roles of NYSEspecialist

single specialist commission brokers independent floor brokers registered traders

Dealer Agent Catalyst Auctioneer

Commissions

US Market: OTC Market

Trading unlisted stocks Listing requirements NASDAQ stock market NASDAQ market tiers

NASDAQ market makers Other OTC markets

OTC Bulletin Board Pink Sheets

NASDAQ National Market Small Capitalization Market

US Market: Third Market

Listed

stocks traded in OTC market NYSE Rule 390 Commission Network of broker-dealers

US Market: Fourth Market

Direct

trading of stocks between two customers Commissions Alternative trading systems (ATS)

electronic communications networks crossing networks

Other Types of Common Stock Trading in USA

Offshore US

Trading

Rule 144A Securities Depository Receipts (ADR)

American

US Market: Role and Regulation of

Dealers in Exchange and OTC Market

Regulatory

Issues

fragmented market

NASDAQ

Pricing Controversy SEC Cost Study Decimalization Regulation FD SuperMontage

US Market: Trading Mechanisms

Types of Orders

Transactions Costs

market order limit order

explicit costs implicit costs

Short Selling Margin Transactions

initial margin maintenance margin

US Market: Trading Arrangements for Institutional Investors

Block

Trading Trades of 10,000 shares or more of a given stock or trades with a market value of $200,000 or more. Program Trading Simultaneous purchase or sale of shares in a large number of different stocks, which is computer-assisted.

US Market: Price Limits and Collars

Stock

Market Crash of 1987 or Price Limits

Trading

Rule 80B or Circuit Breakers Rule 80A or Trading Collar

US Market: Stock Market Indicators

Dow

Jones Industrial Average S&P 500 NYSE Composite AMEX NASDAQ Composite Value Line Composite Average

Pricing Efficiency of the Stock Market

Forms

of Efficiency

Weak form Semistrong form Strong form

Implications

for Investing in Common Stock

Active strategies Passive strategies