chapter 2 note - CHAPTER 2 SECURITIES MARKETS QUESTIONS I...

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5 CHAPTER 2 SECURITIES MARKETS QUESTIONS: I. How securities (Stocks, Corporate Bonds, Treasury Bonds, Options…) are traded? Answer: securities are traded in a variety of market procedures. Two major types are: A: Organized Exchanges: All trading is carried out in one place (location) such as New York Stock Exchange (NYSE). It provides a continuous market, establishing and publicizing fair security prices like auction, there are listing requirements. Examples of some organized exchanges are: The International Monetary Market (IMM). American Stock Exchange The Philadelphia Board of Trade (PBOT) The Bolsa Mercadorias & de Futuros in Brazil B. Over-the-Counter (OTC) Market (sometimes referred as dealer markets): Here we don’t have a place or location that traders buy and sell securities. In the OTC markets buyers and sellers are linked by a sophisticated telecommunication network. In an OTC market, each security (stock or bond) has a few dealers who keep inventories of that security. The dealers are ready to buy or sell that security at ask and bid price. The difference between ask-bid price is their profits. Through computer telecommunications, brokers have access to ask-bid price of dealers. So if you ask your broker to buy a security (stock or bond) , then your broker looks at the price information for that security from various dealers and pass those information to you. Brokers and dealers who participate in the OTC market are members of NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD). The telecommunication system used by the NASD is known as the Nasdaq. Nasdaq started as a quotation system, however, it has grown to become an organized securities market with its own listing requirements (not as restrictive as NYSE). Listed securities are traded through a formal exchange such as the New York Stock Exchange. The securities of unlisted firms are traded over-the-counter market. The primary OTC market is the Nasdaq stock market. There is also an OTC market for smaller and less actively traded stocks (such as the "pink sheets"). The investor may obtain quotes and executions as rapidly for Nasdaq and other OTC stocks as for listed securities.
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6 Market makers (i.e., securities dealers) offer to buy and sell securities at prices they quote (i.e., the bid and ask). They maintain markets in securities (stocks or bonds). Their sources of profit are (1) the difference between the price at which they buy and the price at which they sell (i.e., the spread between the bid and ask), (2) interest and dividend income received on the inventory of securities they own, and (3) price appreciation in the value of their inventory of securities. II. CHOOSING A BROKER In order to trade various securities, you need to open an account with a broker. We have three types of brokers: Full service brokers, discount brokers, and deep-discount brokers. With full service broker, you get many services, including investment advice, research
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This note was uploaded on 09/21/2011 for the course FINANCE 4320 taught by Professor Omaral-nasser during the Spring '11 term at University of Houston-Victoria.

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chapter 2 note - CHAPTER 2 SECURITIES MARKETS QUESTIONS I...

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