Markets and Market structures...and stuff !!

Direct search markets- where I go and directly buy stocks from the companies.

Dealer market- dealers buy from companies and I can buy from them

Broker market – they don’t buy, but help me buy, they take commission.

Primary market – Investment bankers act as brokers, seeking customers to purchase securities directly from corporation.

Secondary market- Existing securities are traded from investors to investors.

Organized markets – Like NYSE and Nasdaq

Over the counter market – Network of dealers

Third market - Over-the-counter trading of listed securities among institutional investors and broker/dealers for their own accounts, rather than as agents for investors.

Forth market – trading directly between investors

ECN’s Electronic Communication networks

Trading mechanics

Every order placed with a broker must be given with following information

Name of issue

Purchase or sell

Date

Size – multiples of 100s or not

Length of time the order is to be outstanding

Day/week/month order

Good till cancelled

Fill or kill

Type of order and order price

Market orders

Limit orders ( limit buy, limit sell )

Stop orders ( stop buy, stop sell )

Short sell – Uptick rule Short sell is allowed if last trade was at a higher price than previous.

Short selling

A short seller borrows from a original holder and sells to a new holder ( voting rights remain with the original ) but dividend goes to new holder. Short seller might make or lose money. * ( star will be used for this situation )

Margin = ( Market value – amount borrowed ) / Market Value.

Initial – must be 50 % and maintenance margin depends on the broker and customer. Margin’s effect on return – you can expand your returns but at a higher risk. If you lose, you will lose more than you could if you invested your own money. !!

Margin call will occur when Pc = ( N Po + E ) / N*( 1 + M )

Structure of bonds

Straight

Coupon

Zero Coupon

Callable – Putable – Convertible

Floating rate – Coupon rate is adjusted to reflect current market interest rates

Coupon rate = LIBOR + 1% ( London inter bank offer rate )

Inverse floaters –> Coupon rate = 14 % - LIBOR

Thus coupon’s interest is divided into two making Floaters( riskfree ) and Inverse Floaters ( risky * higher returns possible)

Bond Risk

Interest rate risk

Reinvestment rate risk

Call risk

Default risk

Inflation risk

Exchange rate risk

Liquidity risk

Volatility risk

Risk risk

Time value of money

ASSUMPTION – rate is constant

.r = (1 + R/m) ^ m

effective interest rate is R / m

where m is number of times it is compounded in the year.

FV = ( 1 + R ) ^ T * Vo

Continuous

FV= exp( R*T) * Vo

Money multiplier = (1 + R ) ^T

Annuity Valuation

.d1 = 1/ (1 + R/m)

An(R/m) = Z + Z^2 + Z^3 ….+ Z^n