1. Security Markets Flashcards
How are financial markets organized?
- Dealer markets (intermediary so fixed income, charge a spread)
- Agency or auction markets / Limit order book (most stock market and some derivate markets)
Why do we care how markets are organized?
- Type of market determines way of trading
- Trading is important consideration in portfolio management and asset pricing
How do trading costs and market liquidity relate?
- Trading involves costs
- Since trading is costly, investors are concerned about market liquidity
What characteristics does market liquidty involve?
(5 kenmerken)
- Ease of sale
- Necesarry price concesions to effect a quick transaction
- Price predictability
- Transaction costs (fixed, variable)
- Depth (how many interested people)
What is a dealer market?
In dealer markets, buyers and sellers do not trade with each other, but with “dealers” (usually banks) who act as intermediary and stabilize the market by supplying immediacy
intermediary = mediater. Advantage is that the bank always gives a price
- if I want to sell my bonds, i dont have to wait for a seller
What is a bid-ask spread?
The bid-ask spread is the difference between the highest price a buyer will offer (the bid price) and the lowest price a seller will accept (the ask price).
What is an Agency market?
In agency markets, order flow meets at central place (e.g., the stock exchange)
So buyers and sellers directly trade with each other
In most agency or auction markets there is one market maker or specialist for each stock, what do they do?
“Specialists handle much of the order flow for stocks assigned to them by the exchange and have the affirmative obligation to make fair and orderly markets for their stocks.”
A market where all traders in an asset meet (either physically or electronically) at one place to buy and sell.
6 roles of financial markets
- Allocation of capital
- Consumption timing / smoothing: early on in your life you need to borrow money, while later on in your life you have spare cash that you want to invest.
- Separation of ownership and control
- Provision of liquidity: because of markets, you’re able to buy/sell whenever you want.
- Allocation of risk: markets allow people to invest according to their risk profile. If you’re risky you invest in equity, otherwise you invest in debt.
- Information aggregation through prices: markets allow to gather information through stock prices.
Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.
If the maintenance margin is 25%, how low can Xtel’s price fall before you get a
margin call?
margin trade when call?
1000P-5 000/ 1000P = 0.25
amount shares * price - amount borrowed / amount shares * price
Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.
b. If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin
call?
(total amount borrowed own stake) - sharesp / sharesp