Lecture One Flashcards
Real Assets
ownership of tangible things
Investment is linked to
rationale to buy or sell, to exploit undervaluation
Financial Assets
instruments that represent ownership of real assets and cash flows they produce
Derivative Contracts
derive their value from other instrumental values
Buy Side
people and institutions who use financial services
Sell Side
those who provide financial services
Orders
instructions to trade, given to brokers and/or exchanges
Trade Decision
concerns how to execute the investment decision – in which markets, at what prices and at what time and through which agents
- Acquisition of information
- Routing of the order
- Execution of the trade
- Confirmation, clearance and settlement
Limit Order
instructs broker to trade at the best available price but do not violate limit price condition
- Do not buy at a price above the limit price
- Do not sell at a price below the limit price
Limit Orders may not execute
standing limit orders supply liquidity by allowing others to trade when they want
Market Orders
buy/sell orders that are to be executed immediately at the market price
Properties of a Market Order:
- Consumption of liquidity
- Have a market impact when brokers move prices to find liquidity
- Execution is near certain but execution price may be uncertain
Stop Orders
price contingent orders
- Activate when price contingency is met
- Almost always market orders
- Typically used to close long positions
Duration Orders:
- Day order
- Good til cancelled order
- Fill or kill order
- Immediate or cancel orders
Bargaining
negotiation process over contract terms that occurs between a buyer and seller
- Useful with large orders
Auction
competitive market process involving multiple buyers, multiple sellers or both
- Useful and effective method for pricing a security with an unknown value
Walrasian Auction
simultaneous auction where each buyer submits to the auction his demand and each seller submits their supply for a given security at every possible price e.g. opening and closing auctions on the ASX
Utalitarian Traders:
Investors Borrowers Asset Exchangers Tax-Avoiders Hedgers
Dutch Auction
bids are sorted according to price and auctioneer works back from highest bid until all shares are sold
First-Price Sealed-Bid Auctions
bidders simultaneously submit sealed bids – winner is the one who submits the highest bid. Does not allow for price discovery. Winners curse may arise if value is not known with certainty
Continuous Double Auctions
buyers submit bids (max buys prices) and sellers submit offers (min sell price)
- Bids and offers are ranked according to price
- Transaction occurs when the highest bid and lowest offer matches
Development in Markets
profit motives resulted in the need for growth and subsequently mergers took place
Past Decade Development
numerous new entrants into the market giving rise to alternative trading systems
- Fragmented markets i.e. Chi-X
- New types of traders focused on speed and technology
- Trading via innovation
Capital Market is necessary for
economic growth and development, the secondary market, companies need capital to fund projects
Price Discovery
process of determining the price of an asset through the interaction of buyers and sellers
Profit Motivated Traders:
Speculators
Arbitrageurs
Algorithmic traders
Dealers
