2. Outline
Meaning of Financial Markets
Role of Financial Markets
Types of Financial Markets
– Primary Markets
– Secondary
• Stock Exchanges
• Over-the-Counter Market
• Third and Fourth Market
Mechanics of Trading
– Types of Orders
– Margin Trading
3. Financial Markets
A place where borrowers and lenders are
brought in contact with one another
Help in allocation of scarce resources in
the economy
Channeling savings into investments
Provide an economy’s link with the future
4. Primary Markets
New issues market which brings together the
supply and demand or sources and uses for new
capital funds
A market where securities are issued for the first
time
contributes directly to capital formation
any increase in primary market activity leads to
more investment, more capital formation
5. Secondary Market
Deals in existing securities; market for buying and selling of existing securities
does not directly contribute to capital formation
increase in volume of business in the secondary market does not mean more capital
formation
Indirectly helps in capital formation
Secondary markets can be classified as:
– Auction Markets
– Negotiated Markets
Stock Exchanges are classified as auction markets
Over-the-Counter Market
What is a third market?
What is a fourth market?
6. Mechanics of Trading
Open a brokerage account
– cash account
– margin account
Types of Orders
– Market order
• buy/sell securities at the best available price in the market
– limit order
• specifies a particular price to be met or bettered
– stop order
• specifies a certain price at which a market order is to take over
7. Margin Trading
A customer can pay part of the total amount due and borrow the remainder from the
broker, who in turn typically borrows from a bank to finance customers.
Margin is that part of a transaction’s value that a customer must pay to initialize the
transaction. It is part of the total value of the transaction that cannot be borrowed from
the broker.
What is initial margin?
– Part of a transaction’s value that a customer must pay to initialize a transaction
What is maintenance margin?
– Minimum amount needed in the investors account at all times as compared to the
market value
What is margin call?
– A margin call is issued when the actual margin declines below the maintenance
margin
8. Market Value of
securities minus Amount Borrowed
Actual Margin = -----------------------------------------------------------
Market Value of Securities