1 FINANCIAL MARKETS Market Charakter (classification) 2 Market charakter 3 Market charakter Breadth market Thin market Depth market Shallow market Market elasticity 4 Breadth/Thin Market The fraction of the overall market that is participating in the markeťs up or down move. Looking at this parameter allows investors to reduce the impact of the large cap stocks which influence market indices the most, and instead examine price trends of a diverse range of stocks. This parameter is important in the context of technical analysis, as a measure of market sentiment. Market breadth is also used to refer to the number of independently issued price forecasts for a certain number of stocks (less common) 5 Depth Market The number of shares of a security that can be bought or sold without causing an appreciable change in price. Factors ­ Tick size ­ Price movement restrictions ­ Trading restrictions ­ Allowable leverage ­ Market transparency 6 Shallow market A market with few bid and ask offers. Characterized by low liquidity, high spreads, and high volatility. Small changes in supply and/or demand can have a dramatic impact on market price. Also called narrow market. Opposite of liquid market. 7 Financial Market classification (1) Form trade ­ Physical ­ electronic Period trade ­ Continuous ­ Auction-call market Maturity of products ­ Money market ­ Capital market Activations financial instruments (durability) ­ Primary markets ­ Secondary markets 8 Financial Market classification (2) Segmentation and character financial instrument ­ Bond ­ Stock ­ Commodities ­ Currencies Origin of emitens and emission locality ­ National markets (intern) * Domestic markets (inland) * Forein markets ­ Euromarkets (international) Contract time and market realization ­ Prompt market (spot) ­ Term market (future forward) 9 Segmentation financial markets 10 Financial Market efficiency Alocate efficiency Information efficiency ­ Low ­ Medially ­ Strenght Operation efficiency 11 SECURITY TYPES 12 Security Security is transferable financial instrument possible to trade on primary an secondary securities markets. At a present time just a note in computer database. 13 Classifying Securities a) after subjects issue State stock company, Investment company juridical person b) currencies inland foreign euro currency c) convertibility Nameless - owner stock ­ unlimited convertibility Name stock ­ convertibility only with owner agreement, 14 Classifying Securities d) after yield Fix yield Variable yield Mix yield e) maturity Fix Floating 15 Investor can Invest directly in Money market securities Capital market securities Other types of securities Invest indirectly in Money market securities Capital market securities Other types of securities Use a combination of direct and indirect investing 16 Security Types Our goal in this chapter is to introduce the different types of securities that investors routinely buy and sell in financial markets around the world. For each security type, we will examine: ­ Its characteristics, ­ Its potential gains and losses, and ­ How its prices are quoted in the financial press. 17 Classifying Securities Basic Types Major Subtypes Interest-bearing Money market instruments Fixed-income securities Equities Common stock Preferred stock Derivatives Options Futures 18 Interest-Bearing Assets Money market instruments are short-term debt obligations of large corporations and governments. ­ These securities promise to make one future payment. ­ When they are issued, their lives are less than one year. Fixed-income securities are longer-term debt obligations of corporations or governments. ­ These securities promise to make fixed payments according to a pre-set schedule. ­ When they are issued, their lives exceed one year. 19 Money Market Instruments Examples: U.S. Treasury bills (T-bills), bank certificates of deposit (CDs), corporate and municipal money market instruments. Potential gains/losses: A known future payment/except when the borrower defaults (i.e., does not pay). Price quotations: Usually, the instruments are sold on a discount basis, and only the interest rates are quoted. Therefore, investors must be able to do calculate prices from the quoted rates. 20 Fixed-Income Securities Examples: U.S. Treasury notes, corporate bonds, car loans, student loans. Potential gains/losses: ­ Fixed coupon payments and final payment at maturity, except when the borrower defaults. ­ Possibility of gain (loss) from fall (rise) in interest rates ­ Depending on the debt issue, illiquidity can be a problem. (Illiquidity means it is possible that you cannot sell these securities quickly.) 21 Quote Examp. Fixed-Income Securities Price quotations: NEW YORK BONDS Corporation Bonds CUR NET BONDS YLD. VOL CLOSE CHG. ATT 61/213 6.6 153 97.75 -0.13 ATT 81/822 8.1 651 100.88 +0.25 ATT 81/824 8.0 316 101 -1.50 AT&T, the issuer of the bond. The bond will mature in the year 2022. The annual coupon rate. You will receive 8 1/8% of the bonďs face value each year in 2 semi-annual coupon payments. 22 Quote Examp.Fixed-Income Securities Price quotations: NEW YORK BONDS Corporation Bonds CUR NET BONDS YLD. VOL CLOSE CHG. ATT 61/213 6.6 153 97.75 -0.13 ATT 81/822 8.1 651 100.88 +0.25 ATT 81/824 8.0 316 101 -1.50 Current Yield = Annual Coupon / Current Price The number of bonds traded that day. The closing price for the day is 100.875% of face value. The closing price is up by 0.25 of one percent from the previous day. 23 Equities Common stock: Represents ownership in a corporation. A part owner receives a pro rated share of whatever is left over after all obligations have been met in the event of a liquidation. Preferred stock: The dividend is usually fixed and must be paid before any dividends for the common shareholders. In the event of a liquidation, preferred shares have a particular face value. 24 Common Stock Examples: IBM shares, Microsoft shares, Intel shares, etc. Potential gains/losses: ­ Many companies pay cash dividends to their shareholders. However, neither the timing nor the amount of any dividend is guaranteed. ­ The stock value may rise or fall depending on the prospects for the company and marketwide circumstances. 25 Common Stock Price Quotes 26 Preferred Stock Example: Citigroup preferred stock. Potential gains/losses: ­ Dividends are "promised." However, there is no legal requirement that the dividends be paid, as long as no common dividends are distributed. ­ The stock value may rise or fall depending on the prospects for the company and marketwide circumstances. 27 Money Market securities Money market (the maturities from one day to one year) ­ the market for short term , highly liquid, low risk assets Treasury bill (T-bill) Sold at discount by government 13-26 weeks Negotiable certificates of deposits (CDs) 14-days ­ one year Commercial paper Well-known and financially strong corporations 270 days or less Eurodollars Repurchase agreement Bankers acceptance 28 Capital Market - Fixed income securities Fixed income securities with specified payment dates and amounts Federal government securities Treasury bonds ­maturity of 10 to 30 years Federal Agency securities Issued by federal credit agencies (fed.financ. bank) Municipal bonds Issued by political entities ­ states, cities Corporate bonds Long term debt securities of various types sold by corporations Preferred stock ­ equity security with an intermediate claim on a firm´s assets and earnings 29 Other types - Equity derivative securities Equity derivative securities Securities that derive their value in whole or in part by having a claim on the underlying common stock Warrant A corporate created option to purchase a stated number of common shares at a specified price within a specified time (typically several years) Convertible Securities Bonds or prefered stocks, that are convertible¨, at the holders option, into shares of common stock of the same corporation Option The right but not the obligation to buy or sell shares of stock within a specified period at a specified time. Put ­ an option to sell, Call ­ an option to buy Futures contracts Agreement providing for the future exchange of a particular asset at a currently determined market price.