ch3outline - Chapter 3 outline I Securities Market II How...

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Chapter 3 outline I. Securities Market II. How securities are traded A. Types of Markets 1. We can differentiate four types of markets: direct search markets, brokered markets, dealer markets, and auction markets 2. Direct Search Markets a. A direct search market is the least organized market b. Buyers and sellers must seek each other out directly c. An example in such of a transaction in such a market is the sale of a used refrigerator where the seller advertises for buyers in a local newspaper d. Characterized by sporadic participation and low-priced and nonstandard goods e. It does not pay most people or firms to seek profits by specializing in such an environment 3. Brokered markets a. In a markets where trading in a good is active, brokers find it profitable to offer search services to buyers and sellers b. A good example is the real estate market, where economies of scale in searches for available homes and for prospective buyers make it worthwhile for participants to pay brokers to conduct the searches c. Brokers in particular markets develop specialized knowledge on valuing assets trade in that market d. Large block transactions - a brokered market in which very large blocks of stock are bought or sold 1) These blocks are so large that brokers or “block houses” often are engaged to search directly for other large traders, rather than bring the trade directly to the markets where relatively smaller investors trade 4. Dealer markets a. When trading activity in a particular type of asset increases, dealer markets arise b. Dealers specialize in various assets, purchase these assets for their own accounts, and later sell them for a profit from their inventory c. The spreads between dealers’ buy(or “bid”) prices and sell(or “ask”) prices are a source of profit d. Dealer markets save traders on search costs because market participants can easily look up the prices at which they can buy from or sell to dealers e. The over-the-counter(OTC) securities market is one example of a dealer 5. Auction markets a. The most integrated market is an auction market , in which all traders coverage at one place to buy or sell an asset
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b. The New York Stock Exchange is one example c. An advantage of auction markets over dealer markets is that one need not search across dealers to find the best price for a good d. Continuous auction markets require very heavy and frequent trading to cover the expense of maintaining the market e. For this reason, the NYSE and other exchanges set up listing requirements, which limit the stocks traded on the exchange to those of firms in which sufficient trading interest is likely to exist f. The organized stock exchanges are also secondary markets B. Types of orders 1. Broadly speaking, there are two types of orders: market orders and orders contingent on price 2. Market orders a. Market orders are buy or sell orders that are to be executed immediately at current market prices b. The posted price quotes actually represent commitments to trade up to a specified number of shares
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This note was uploaded on 09/10/2010 for the course FIN 367 taught by Professor Han during the Fall '08 term at University of Texas.

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ch3outline - Chapter 3 outline I Securities Market II How...

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