Organisation and functioning of securities markets Flashcards Preview

Financial Risk Management 212 > Organisation and functioning of securities markets > Flashcards

Flashcards in Organisation and functioning of securities markets Deck (37)
Loading flashcards...
1

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

2

Characteristics of well-functioning securities market

- Availability of Information

- Liquidity & price continuity

- Transaction costs

- External (informational) efficiency

3

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

4

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

5

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

6

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

7

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

8

Secondary market

Used to buy and sell these newly issued securities between investors, after they were initially issued

9

Third market

a.k.a the Over The Counter (OTC) market, which involves unlisted securities through the use of brokers

10

Fourth market

Direct trading of securities between two parties with no intermediary broker

11

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

12

Market structures

Refer to the way in which a market is organised and the role members of the exchange play in completing transactions

13

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

14

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

15

South African secondary market

- JSE Limited
- BESA
- SAFEX

16

JSE Limited

- Previously JSE securities exchange and Johannesburg stock exchange
- Largest stock exchange in Africa

17

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

18

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

19

Types of transactions

- Market order

- Limit order

- Short Selling

- Special orders

- Margin transactions

20

Market order

- buy at the best price
- provide extra liquidity

21

Limit order

Specify the buy or sell price

22

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

23

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

24

Margin transactions

Involve the use of borrowage (leverage) to pay for shares purchased, while the balance is paid for in cash

25

Trading system before 1996

Outcry method / Floor trading

26

Trading system after 1996

Johannesburg Equities Trading (JET) System

Share Transactions Totally Electronic (STRATE)

NOOOG?????

27

The JSE offers 5 financial markets namely

- equaties
- bonds
- financial derivatives
- commodity derivatives
- interest rate derivatives

28

Market Indices

Convenient way of providing investors with an indication of the movement of the aggregate market

29

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

30

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