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    Chap 3

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    Phương Anh Nguyễn
    This document discusses how securities are traded in the primary and secondary markets. It explains the process of initial public offerings and seasoned offerings in the primary market and how investors trade previously issued securities in the secondary market. It also outlines the costs of trading including brokerage commissions and the bid-ask spread. The document describes how margin trading allows investors to control a position larger than their cash by borrowing from the broker and the risks of margin calls if the value of securities declines. It concludes by explaining how short selling works where an investor sells securities they have borrowed with the goal of profiting if the price falls.

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    © All Rights Reserved
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    Chap 3

    Uploaded by

    Phương Anh Nguyễn
    9 views2 pages
    This document discusses how securities are traded in the primary and secondary markets. It explains the process of initial public offerings and seasoned offerings in the primary market and how investors trade previously issued securities in the secondary market. It also outlines the costs of trading including brokerage commissions and the bid-ask spread. The document describes how margin trading allows investors to control a position larger than their cash by borrowing from the broker and the risks of margin calls if the value of securities declines. It concludes by explaining how short selling works where an investor sells securities they have borrowed with the goal of profiting if the price falls.

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    financial investment

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    CHAP 3

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    This document discusses how securities are traded in the primary and secondary markets. It explains the process of initial public offerings and seasoned offerings in the primary market and how investors trade previously issued securities in the secondary market. It also outlines the costs of trading including brokerage commissions and the bid-ask spread. The document describes how margin trading allows investors to control a position larger than their cash by borrowing from the broker and the risks of margin calls if the value of securities declines. It concludes by explaining how short selling works where an investor sells securities they have borrowed with the goal of profiting if the price falls.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    9 views2 pages

    Chap 3

    Uploaded by

    Phương Anh Nguyễn
    This document discusses how securities are traded in the primary and secondary markets. It explains the process of initial public offerings and seasoned offerings in the primary market and how investors trade previously issued securities in the secondary market. It also outlines the costs of trading including brokerage commissions and the bid-ask spread. The document describes how margin trading allows investors to control a position larger than their cash by borrowing from the broker and the risks of margin calls if the value of securities declines. It concludes by explaining how short selling works where an investor sells securities they have borrowed with the goal of profiting if the price falls.

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    CHAPTER 3: How Securities Are Traded

    I. How Firms Issue Securities:

    Primary Market Secondary Market


    – Firms issue new securities through – Investors trade previously issued
    underwriter to public securities among themselves
    – Investors get new securities; firm gets – Issuing firm doesn’t receive proceeds
    funding (belongs to investors)

     Stocks
    – IPO (Initial public offering): The first issue of shares to the general public.
    – Seasoned offering: the sale of additional shares in firms that already are publicly
    traded.
     Bonds
    – Public offering: marketed by investment bankers who in this role are called
    underwriters.
    – Private placement: When private firms wish to raise funds, they sell shares directly
    to a small number of institutional or wealthy investors in a private placement.
    II. Trading Costs:
    1. Brokerage Commission (môi giới hoa hồng): fee paid to broker for making the
    transaction
    – Explicit cost of trading (chi phí hiện)
    – Full Service vs. Discount brokerage
    2. Spread: Difference between the bid and asked prices
    – Implicit cost of trading (chi phí ẩn)
    III. Buying on Margin (Mua ký quỹ):
    - Investors borrowing part of the total purchase price of a position using a loan from a
    broker. (broker’s call loan)
    - Investor contributes the remaining portion.
    - You profit when the stock appreciates.
     For example: you need 1000$ to buy 100 shares at the price 10$/share but you
    only have 600$ -> then you borrow the remain from the security institution.

    ending equity−beginning equity


    =
    value of stock
     Initial margin (tỉ lệ ký quỹ ban đầu) is set in the U.S. by the Fed – Currently 50%
     Maintenance margin (tỉ lệ ký quỹ duy trì)
    – Minimum equity that must be kept in the margin account
    – Margin call if value of securities falls too much
    - If the %margin < maintenance -> u need to add more cash to reach the maintenance
    level. If u does not do this, the seller may sell the securities to others
    Why investors buy securities on margin?
    - They do so when they wish to invest an amount greater than their own money allows.
    Thus, they can achieve greater upside potential, but they also have greater downside
    risk.
    IV. Short Sales (Bán khống):
    - Normally, an investor would first buy a stock and later sell it. With a short sale, the
    order is reversed. First, you sell and then you buy the shares. In both cases, you begin
    and end with no shares.
     Purpose: to profit from a decline in the price of a stock or security
     Mechanics
    – Borrow stock through a dealer
    – Sell it and deposit proceeds and margin in an account
    – Closing out the position: buy the stock and return to the party from which it
    was borrowed

    - Percentage of margin:

    - Short-sellers also are required to post margin (cash or collateral) with the broker to
    cover losses should the stock price rise during the short sale.
    - Like investors who purchase stock on margin, a short-seller must be concerned about
    margin calls. If the stock price rises, the margin in the account will fall; if margin falls
    to the maintenance level, the short-seller will receive a margin call.

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