Chapter 03 – How Securities Are Traded
CHAPTER THREE
HOW SECURITIES ARE TRADED
CHAPTER OVERVIEW
This chapter discusses how securities are traded on both the primary and secondary markets, with detailed
LEARNING OBJECTIVES
After studying this chapter the student should have considerable insight as to how securities are traded on
PRESENTATION OF MATERIAL
3.1 How Firms Issue Securities
Key characteristics of primary and secondary sales of securities are presented here. The relationship
between the primary market terms and activity in the secondary market presents a good opportunity for
class discussion and relating the material in the investment class to principles of finance.
Chapter 03 – How Securities Are Traded
3-2
3.2 How Securities Are Traded
This section presents the major types of secondary markets. The discussion of secondary markets should
be focused on services rather than institutional characteristics of our markets. Discussion of different
demands for services by different types of investors can help students understand the recent developments
3.3 The Rise of Electronic Trading
This section discusses how the interaction of new technologies and new regulations lead to electronic
trading. In 1975, the NYSE eliminated fixed commissions and National Market System was created in the
3.4 U.S. Markets
The domestic securities markets have undergone significant reorganization and restructuring since the
mid–1970s. For example a major component of today’s market includes the Nasdaq market system that
3.5 New Trading Strategies
This section presents new trading strategies that came into play after the development of the electronic
3.6 Globalization of Stock Markets
Figure 3.8 demonstrates the biggest stock markets in the world by domestic market capitalization, with
Chapter 03 – How Securities Are Traded
3.7 Trading Costs
On some trades only a commission is paid; on others, only a portion of the spread is paid; and many
3.8 Buying on Margin
This section introduces margin trading. The use of actual borrowing of funds contrasts with margin
arrangement in futures. While both futures and stock trading have maintenance margins and margin calls
3.9 Short Sales
With the background developed in margin trading, the concept of short selling is then covered. A brief
description of the mechanics of a short sale is shown here. While stock is generally available for short
sellers, sometimes short sellers are not able to find additional stock to borrow when stock is called back
3.10 Regulation of Securities Markets
Recent scandals have rocked the securities markets. This is an area that has received and continues to
Excel Applications
Two Excel models are available for margin trading and short sales. These models allow the student to