Organisation and functioning of securities markets Flashcards
Market
The means by which buyers and sellers are put in contact with one another for the purpose of trading goods and/or services
A securities market enables buyers and sellers to trade securities
Characteristics of well-functioning securities market
- Availability of Information
- Liquidity & price continuity
- Transaction costs
- External (informational) efficiency
Availability of information
In order to determine an appropriate price, participants must be able to timeously and accurately determine the volume and prices of past transactions and all current bids and offers
Liquidity & price continuity
Liquidity refers to assets which can be bought and sold quickly at a price close to the prices of previous transactions
Price continuity means prices do not change much from one transaction to the next unless substances new information become available
Transaction costs
In a well-functioning market, transactions can be concluded at low costs, including the cost of reaching the market, the actual brokerage cost and the cost of transferring the asset
External (informational) efficiency
In a well functioning market, prices rapidly adjust to new information
A market should be informationally efficient if the following apply
- A large number of competing, profit-maximising, independent participants analyse and value securities
- New information arrives randomly
- The corresponding investor attempt to adjust prices rapidly to reflect the new information
Primary market
Sells newly issued securities of companies and is also involved in initial public offerings (IPOs)
IPO - Sale of ordinary shares of a company to the public for the first time
Secondary market
Used to buy and sell these newly issued securities between investors, after they were initially issued
Third market
a.k.a the Over The Counter (OTC) market, which involves unlisted securities through the use of brokers
Fourth market
Direct trading of securities between two parties with no intermediary broker
Prospectus
Provides extensive details of the financial performance of the firm prior to the listing and shows that it meets the listing requirements, along with a registration statement and details of the company’s operations
Market structures
Refer to the way in which a market is organised and the role members of the exchange play in completing transactions
To qualify for membership to the South African Institute of Stockbrokers, applicants must
- be at least 21 years of age
- have passed the membership examination
- be fit and proper in terms of criteria as determined by the Institute
- have been continuously employed by a member of the JSE for at least six months
To qualify for membership to the South African Institute of Stockbrokers, applicants must
- be at least 21 years of age
- have passed the membership examination
- be fit and proper in terms of criteria as determined by the Institute
- have been continuously employed by a member of the JSE for at least six months
South African secondary market
- JSE Limited
- BESA
- SAFEX
JSE Limited
- Previously JSE securities exchange and Johannesburg stock exchange
- Largest stock exchange in Africa
BESA
- Bond Exchange of South Africa
- Acquired by JSE Limited in 2009
- Was responsible for operating and regulating the debt securities and interest rate derivatives markets in South Africs
SAFEX
- South African Futures Exchange
- The futures subsidiary of JSE Limited
Consists of two divisions:
- A financial markets division for trading of equity derivitaves
- Agricultural Markets Division (AMD) for trading agricultural derivitaves
Types of transactions
- Market order
- Limit order
- Short Selling
- Special orders
- Margin transactions
Market order
- buy at the best price
- provide extra liquidity
Limit order
Specify the buy or sell price
Short selling
Shares the investors does not own to with the intention of buying them back at a lower price at a later stage
The investor who lends the shares receives the proceeds as collateral and can invest this in short term, risk free securities
A short sale can usually only be made on the uptick trade - price higher than the last trade price
The short seller must pay the lender of the shares the dividends due to him
Special orders
Stop-loss orders -
Conditional market order that directs the trade should the share price decline to a predetermined price
Stop-buy orders -
Used by short sellers who want to minimise any loss should the share increase in value
Margin transactions
Involve the use of borrowage (leverage) to pay for shares purchased, while the balance is paid for in cash
Trading system before 1996
Outcry method / Floor trading
Trading system after 1996
Johannesburg Equities Trading (JET) System
Share Transactions Totally Electronic (STRATE)
NOOOG?????
The JSE offers 5 financial markets namely
- equaties
- bonds
- financial derivatives
- commodity derivatives
- interest rate derivatives
Market Indices
Convenient way of providing investors with an indication of the movement of the aggregate market
Uses of market indices
- Benchmarks to evaluate the performance of professional portfolio managers
- To create and monitor an index fund
- To measure market rates of return in economic studies
- To predict future market movements
- To calculate systematic risks of an asset
Factors in constructing indices
- The size, breadth and source of the sample
- The sample should be representative of the total population
- The weight given to each constituent of the sample
- The calculation process, whether it is arithmetic or geometric average
Weighting Schemes
Value weighted
Price weighted
Equally weighted
Value-weighed
Considers the total market capitalisation for a company
In some cases it also considers the free-floating shares. A free-floating factor is used to indicate the percentage of issued share capital available for purchase in the market
The company with the highest market cap would have the highest weight in the index
Price-weighted
The share price is what gives a certain company their weight within the index
The company with the highest price will carry the most weight
Equally-weighted
Each company represents an equal portion of the index
Recalibration of Index
The index divisor need to be adjusted i such away that the index does not react to corporate actions on share prices
An action such as a share-split would affect the price-weighted index, or new issue of share capital would effect the value weighted index
A new value for d has to be determined such that I before and after the action is the same
Changes in global securities markets
- Negotiated (competitive) commissions
- The influences of block trades
- The influence of share price volatility
- New exchanges and consolidations
- Increased automisation
Changes in global securities markets
- Negotiated (competitive) commissions
- The influences of block trades
- The influence of share price volatility
- New exchanges and consolidations
- Increased automisation
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