TAILIEUCHUNG - Financial Markets and Institutions: Chapter 12

Chapter 12 Market Microstructure and Strategies: describe the common types of stock transactions, explain how stock transactions are executed, describe the regulation of stock transactions, explain how barriers to international stock transactions have been reduced. | 1 1 ■ describe the common types of stock transactions ■ explain how stock transactions are executed ■ describe the regulation of stock transactions ■ explain how barriers to international stock transactions have been reduced 12 Market Microstructure and Strategies Chapter Objectives 2 2 Stock Market Transactions Placing an Order - To place an order to buy or sell a specific stock, an investor contacts a brokerage firm. The investor communicates the order to the broker by specifying (1) the name of the stock, (2) whether to buy or sell that stock, (3) the number of shares to be bought or sold, and (4) whether the order is a market or a limit order. Broker may provide a bid quote if the investor wants to sell a stock or an ask quote if the investor wants to buy a stock. A Market Order is executed at the best possible price. A Limit Order places a limit on the price at which a stock can be purchased or sold. 3 3 Stock Market Transactions Placing an Order (Cont.) Stop-Loss Order - to protect gains or to limit losses. Investor specifies a selling price that is below the current market price of the stock. When the stock price drops to the specified level, the stop-loss order becomes a market order. Stop-Buy Order Investor specifies a purchase price that is above the current market price. When the stock price rises to the specified level, the stop-buy order becomes a market order. 4 4 Stock Market Transactions Placing an Order (Cont.) Placing an Order Online Many Internet brokers accept orders online, provide real-time quotes, and provide access to information about stocks. Some online brokerage services offer zero-commission trades. However, investors must maintain a certain amount of funds in their brokerage accounts. 5 5 Stock Market Transactions Margin Trading Investors use cash along with funds borrowed from their broker to make the purchase. The Federal Reserve imposes initial margin requirements, which represent the minimum proportion of funds that must be covered

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