Chapter 5-How Securities Are Traded-Part 1

Chapter 5-How Securities Are Traded-Part 1 - 5-1Chapter...

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Unformatted text preview: 5-1Chapter 5Charles P. Jones, Investments: Analysis and Management,Tenth Edition, John Wiley & SonsPrepared byG.D. Koppenhaver, Iowa State UniversityHow SecuritiesAre Traded(Part 1)5-2Brokerage OperationsBrokerage firms earn commissions on executed trades, sales loads on mutual funds, profits from securities sold from inventory, underwriting fees and administrative account feesFull-service brokers offer order execution, information on markets and firms, and investment adviceDiscount brokers offer order execution5-3Account TypesCash account: Investor pays 100% of purchase price for securitiesMargin account: Investor borrows part of the purchase price from the brokerAsset management account: automatic reinvestment of excess cash balances in money market fund5-4Account TypesCash management accountChecks can be written against accounts assetsInstant loans at a markup to call money rate based on the accounts assetsWrap account: Brokers match investors with outside money managersAll costs, fees wrapped into one 5-5Fees and CostsBrokerage commissions differ by security, broker, and investorInstitutional investors have greatest negotiating powerDividend reinvestment plans permit reinvestment of dividends in additional stockAvoids commissions, administrative fees5-6Orders in Auction MarketsMost NYSE volume from matched public buy and sell ordersSpets act as both brokers and dealers in the stocks assigned to themMaintain the limit order bookKeep a fair and orderly market by providing liquidity5-7NYSE AutomationSuperDot: An electronic order...
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Chapter 5-How Securities Are Traded-Part 1 - 5-1Chapter...

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