chapter5 - C hapter 5: How Securities Are Traded CHAPTER...

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Chapter 5: How Securities Are Traded CHAPTER OVERVIEW Chapter 5 allows students to concentrate solely on the mechanics of securities trading after learning about financial markets in Chapter 4. This material typically is of great interest to most students, and instructors must decide how much time and effort to devote to it. Chapter 5 devotes considerable attention to the major aspects of brokerage transactions. An important part of this discussion centers around brokers themselves, a subject which tends to interest many students quite a lot. The chapter discussion explains what brokers do, the types of brokerage operations (full- service vs. discount vs. deep discount), how brokers are compensated, and how much they make annually. The remainder of the brokerage transaction discussion covers the major points that students need to know. These include the types of brokerage accounts, commissions, investing without a broker, how orders work, the types of orders, clearing procedures, and so forth. Instructors will wish to vary their discussions of this material depending upon student knowledge, interest, time availability, and current discussions in the popular press. There are numerous interesting illustrations that can be given of brokerage costs, how orders work on the exchanges and in the OTC, market orders versus limit orders, and so forth. The popular press regularly has articles that would be appropriate for class discussion, including Smart Money , Worth , Forbes , Business Week , and Financial World . Chapter 5 contains a thorough discussion of investor protection in the markets, a topic of concern to many investors. This covers not only federal legislation and the SEC but also self-regulation by the stock exchanges, including the latest measures on the NYSE such as trading halts and sidecars. The role of the NASD in regulating brokers and dealers also is covered. An extended example of regulation involving penny stocks is given. The remainder of the chapter is devoted to margin trading and short selling. These are important subjects, and ones that many students have difficulty understanding, particularly short selling. It is suggested that instructors spend a reasonable amount of time explaining these concepts. 5-1
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CHAPTER OBJECTIVES 1. To provide students with a good understanding of what brokers do, how securities are traded, and so forth as a natural extension of the discussion of financial markets in Chapter 4. 2. To explain the mechanics of securities trading, such as brokerage transactions, margin trading, and short selling. 3. To provide an overview of how markets are regulated without simply describing the various federal acts. 5-2
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MAJOR CHAPTER HEADINGS [Contents] Brokerage Transactions ! Brokerage Firms [full-service brokers, discount brokers, deep-discount brokers] ! Stockbrokers--Or, Financial Consultants [how do brokers earn their income and how much do they earn?] ! Types of Brokerage Accounts [cash vs. margin, asset management account, wrap account]
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chapter5 - C hapter 5: How Securities Are Traded CHAPTER...

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