chapter 13 Flashcards
A measure of liquidity for a stock market is
the turnover ratio; that is, the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market. Generally the higher the turnover ratio, the more liquid the secondary stock market, indicating ease in trading
market order
is executed at the best price available in the market when the order is received, that is, the market price
Limit order
an order away from the market price that is held in a limited order book until it can be executed at the desired price
Dealer market
the broker takes the trade through the dealer, who participates in trades as a principal by buying and selling the security for his own account
Agency market
the broker takes the clients order through the agent, who matches it with another public order. The agent can be viewed as a brokers broker. Other names for the agent are official broker and central broker
over-the-counter (OTC) market
is a dealer market. Almost all OTC stocks trade on the national association of security dealers automated quotations systems (NASDAQ) which is a computer linked system that shows the bid (buy) and ask (sell) prices of all dealers in a security. As many as 20 dealers may make a market in the most actively traded issues
continuous markets
wwhere market and limit orders can be executed at any time during business hours
E.g. OTC or exchange markets us
Call market
an agent of hte exchange accumulates over a period of time, a batch of orders that are periodically executed by written or verbal auction through the trading day. Both market and limit orders are handled this way.
Disadvantage of call markets
Traders are not certain about the price at which their orders will transact because bid and ask quotations
crowd trading
a second type of noncontinuous exchange trading system. Typically, crowd trading is organized as follows:
In a trading ring, an agent of the exchange periodically calls out the name of the issue. At this point, traders announce their bid and ask prices for the issue, and seek counterparts to a trade. Between counterparts a dealm ay be struck and a trade executed. Unlike a call market in which there is a common price for all trades, several bilateral trades may take place at different prices.
Cross listing
refers to a firm aving its equity shares listed on one or more foreign exchanges, in addition to the home country stock exchane. Cross-listing is not a new concept; however, with the increased globalization of world equity markets, the amount of cross-listing has exploded in recent years
Firms may decide to cross list its shares for many reasons
1) cross-listing provides a means for expanding the investor base for a firms stock, thus potentially increasing its demand. Increased demand for a companys stock may increase the market price. Additionally, greater market demand and broader investor base improve the price liquidity of the security
2) cross listing established name recognition of the company in a new capital market, thus paving the way for the firm to source new equity or debt capital from local investors as demand dictate. This is an especially important reason for firms from emerging market countries with limited capital markets to corss-list their shares on exchanges in developed countries with enhanced capital market access
3) Cross-listing brings the firms name before more investor and consumer groups. Local consumers (investors) may more likely become investors in (consumers of ) the companys stock (products) if the companys stock is (products are) locally available. international portfolio diversification is facilitated for investors if they can trade the security on their own stock exchange
4) Cross-listing into developed capital markets with strict securities regulations and infromation disclosure requirements may be seen as a signal to investors that improved corporate governance is forthcoming
5) Cross-listing may mitigate the possibility of a hostile takeover for the firm through the broader investor base created for the firms shares
Bonding theory
a U.S. corss-listing both restricts the ability of corporate insiders of the corss-listed firm from consuming private benefits and also publicly benefits the firm by allowing it to finance new growth opportunities at more advantageous terms.
American depository receipts (ADRs)
an ADR is a receipt representing a number of foreign shares that remain on deposit with the us depository custodian in the issuers home market. The bank serves as the transfer agent for the ADRs which are traded on the listed exchanges in the united states or in the OTC market.
Advantages of using ADRs
ADRs are denominated in dollars, trade on US stock exchange and can be purchased through the investors regular broker.By contrast, trading in theunderlying shares would likely require the investor to: set up an account with abroker from the country where the company issuing the stock is located; make acurrency exchange; and arrange for the shipment of the stock certificates or theestablishment of a custodial account.
- Dividends received on the underlying shares are collected and converted todollars by the custodian and paid to the ADR investor, whereas investment inthe underlying shares requires the investor to collect the foreign dividends andmake a currency conversion. Moreover, tax treaties between the United Statesand some countries lower the dividend tax rate paid by nonresident investors.Consequently, U.S. investors in the underlying shares need to file a form to geta refund on the tax difference withheld. ADR investors, however, receive thefull dollar equivalent dividend, less only the applicable taxes.
- ADR trades clear in three business days as do U.S. equities, whereas settlementpractices for the underlying stock vary in foreign countries.
- ADR price quotes are in U.S. dollars.
- ADRs (except Rule 144A issues) are registered securities that provide for theprotection of ownership rights, whereas most underlying stocks are bearersecurities. Exhibit 13.9 describes the various types of ADR programs.
- An ADR investment can be sold by trading the depository receipt to anotherinvestor in the U.S. stock market, or the underlying shares can be sold inthe local stock market. In this case the ADR is delivered for cancellation
13.10 charts the mechanics of issuance and cancellation of ADRs.
- ADRs frequently represent a multiple of the underlying shares, rather thana one-for-one correspondence, to allow the ADR to trade in a price rangecustomary for U.S. investors. A single ADR may represent more or less thanone underlying share, depending upon the underlying share value.
- ADR holders give instructions to the depository bank as to how to vote the rightsassociated with the underlying shares. Voting rights are not exercised by thedepository bank in the absence of specific instructions from the ADR holders.
