Chapter
The Stock Market
The Stock Market
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The Primary and Secondary Stock Markets
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The Primary Market for Common Stock
– Investment banker designs the stock issue and arranges for fixed
commitment or best effort underwriting.
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IPO Tombstone
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The Secondary Market for Common Stock, I.
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The Secondary Market for
Common Stock, II.
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The New York Stock Exchange
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NYSE Membership
• Seat holders can buy and sell securities on the exchange floor
without paying commissions.
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Types of NYSE Members, I.
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Types of NYSE Members, II.
• When commission brokers are too busy, they may delegate some
orders to floor brokers (1), or two-dollar brokers (2) , for
execution.
– (1) An exchange member who executes orders on the floor of an exchange
on behalf of others who do not have access to the trading area. also called
pit broker.
– (2) The name for a floor broker who performs trades for other brokers, who
are usually too busy to do all of their trades themselves. In return, they are
paid a fee by the other broker. The name originated because the original fee
they were paid was two dollars
– Floor brokers have become less important because of the efficient
SuperDOT system (designated order turnaround). SuperDOT allows orders
to be transmitted electronically directly to the specialist.
• A small number of NYSE members are floor traders, who
independently trade for their own accounts.
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NYSE-Listed Stocks
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Operation of the New York Stock Exchange
• In 2005, the average stock trading volume on the NYSE was just
over 1 billion shares a day.
• Volume breakdown:
– About one-third from individual investors
– Almost half from institutional investors.
– The remainder represents NYSE-member trading, mostly from
specialists acting as market makers.
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NYSE Floor Activity
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Stock Market Order Types
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NASDAQ, I.
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NASDAQ, II.
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NASDAQ, III.
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The NASDAQ System
• The bid and ask prices for the NASDAQ represent inside
quotes.
– The highest bid
– The lowest ask
• For a small fee, you can have access to “Level II” quotes.
– Displays all bids and asks
– Frequently displays the market maker identity
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NYSE and NASDAQ Competitors
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Stock Market Information
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The Dow Jones Industrial Average
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Stock Market Indexes, I.
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Stock Market Indexes, II.
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Stock Market Indexes, III.
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Example I: $1,000,000 to Invest,
Price-Weighted Portfolio
Price Shares
Company Price Weight to Buy
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Example II: Changing the Divisor
Day 1 of Index: Company Price
GM 40.56
Nordstrom 25.91
Lowe's 53.68
Sum: 120.15
Before Day 2 starts, you want to replace Lowe's with Home Depot, selling at $32.90.
GM 40.56
Nordstrom 25.91
Home Depot 32.90
Sum: 99.37
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Example III: $1,000,000 to Invest,
Value-Weighted Portfolio
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Example IV: How Does the
Value-Weighted Index Change?
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The Day 3 Index Can be Calculated in Two Ways:
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Chapter Review, I.
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Chapter Review, II.
• NASDAQ
– NASDAQ Operations
– NASDAQ Participants
– The NASDAQ System
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Chapter Review, III.
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