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BU473 (6)
Chapter 4

BU473 Chapter Notes - Chapter 4: Systematic Risk, Stock Split, S&P 500 Index


Department
Business
Course Code
BU473
Professor
Steve Balaban
Chapter
4

Page:
of 5
Chapter(4:(Securities(Markets(and(the(Economy(
Characteristics*of*a*Good*Market**
Availability*of*past*transaction*information**
o Must*be*timely*and*accurate**
Liquidity**
Low*transaction*costs**
Rapid*adjustments*of*prices*to*new*information:*external*efficiency**
**
Primary*vs.*Secondary*Markets**
Primary*Markets**
IPO*
Primary*Capital*Markets**
!"#$%&'$&()"*)+,&,-,)."&-/)*
o T-bills:*non-interest*bearing*securities*with*original*maturities*in*1*year*or*less**
0%"#1&21,3)4)56&1217,3)."&-/)*
o Guaranteed*by*provincial*treasuries**
+"%7"%,($)."&-)8//6$/)*
o Almost*always*sold*through*a*negotiated*arrangement*with*an*investment*banking*firm*that*
maintains*a*relationship*with*the*issuing*firm**
9("2:/)8//6$/)*
o 9$,/"&$-)&$;)1//6$/<)new*shares*offered*by*firms*that*already*have*stock*outstanding**
o 80=/<)issuing*for*the*first*time**
0%1#,($)03,2$'$&(/)*
o Can*be*traded*among*large*sophisticated*investors**
o Lower*issuing*costs*than*IPOs**
Secondary*Markets**
Outstanding*securities*are*bought*and*sold*by*investors**
Why*are*they*important?*
o Provides*liquidity**
o Helps*determine*market*prices*for*newly*issued*shares**
Secondary*Equity*Markets**
Primary*Listing*Markets**
o TSX,*NYSE**
o TSX*has*2*tiers:**
Tier*1:*senior*listing*of*large*Canadian*companies**
Tier*2*(TSX*Venture*Exchange):*junior*listed*companies**
o Global**
**
Detailed*Analysis*of*Markets:**
Types*of*Orders**
Limit*Orders**
Order*specifies*the*buy*or*sell*price*
Time*specifications*for*orders*may*vary**
Market*Orders**
Buy*or*sell*at*the*best*current*price**
Provides*immediate*liquidity**
**
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Short*Sale*of*a*Stock**
Can*only*be*made*on*an*uptick*trade**
Must*pay*any*dividends*to*lender**
Margin*requirements*apply**
**
Special*Orders**
Stop*Loss**
A*conditional*market*order*to*sell*stock*if*it*drops*to*a*given*price**
Does*not*guarantee*price*you*will*get*upon*sale**
Market*disruptions*can*cancel*such*orders**
Stop*Buy**
A*conditional*market*order*to*buy*stock*if*it*increases*to*a*specified*price**
Investors*who*sold*short*may*want*to*limit*loss*if*stock*increases*in*price**
Margin*Requirement**
Initial*margin*requirement*is*set*by*the*Federal*Reserve*at*50%**
Maintenance*Margin**
Required*proportion*of*equity*to*stock*after*purchase**
Protects*broker*if*stock*price*declines**
25%*minimum*requirement**
Margin*call*on*under-margined*account*to*meet*margin*requirement**
If*margin*call*is*not*met,*the*stock*may*be*sold*to*pay*off*the*loan**
Margin*Transaction*-*Price*Rises**
*
**
*
**
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Margin*Transaction*-*Price*Falls**
*
*
**
Uses*of*Security*Market*Indices**
Benchmarks*to*evaluate*performance*of*professional*money*managers**
To*create*and*monitor*and*index*fund**
To*measure*market*rates*of*return*in*economic*studies**
For*predicting*future*market*movements*by*technicians**
As*a*substitute*for*the*market*portfolio*of*risky*assets*when*calculating*the*systematic*risk*of*an*
asset**
Differentiating*Factors**
Weighting*of*sample*members**
Price-weighted,series,*
Price*Weighted*Index**
o >";)?"&$/)8&-6/(%1,3)@#$%,A$)B>?8@C*
Best-known,*oldest,*most*popular*index**
Price-weighted*average*of*30*large*well-known*industrial*stocks,*leaders*in*their*
industry,*and*listed*on*NYSE**
Sum*of*the*current*price*of*the*30*stocks/divisor**
Calculating*the*DJIA*with*Stock*Split*Effects**
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