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Markets and Transactions【Deric Business Class】 - YouTube
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hey guys welcome to derek business class
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in this video I'm gonna explain to you
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the markets and transactions securities
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markets can be classified as money
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market or capital market in the money
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market short-term securities such as
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certificates of deposit are bought and
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sold in the capital market long-term
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securities such as stocks and bonds are
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bought and sold capital markets can also
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be classified as primary market or
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secondary market primary market the
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market in which new issues of securities
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are sold to the public in the primary
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market the issuer of the equity or debt
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securities receives the proceeds of
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sales the main vehicle in the primary
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market is the initial public offering
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IPO this is the first public sale of a
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company shares the primary markets also
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sell no securities called seasoned new
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issues for companies that are already
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public before securities can be offered
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for public sale the issuer must lodge a
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prospectus which is a public offer
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document and obtain approval from
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Securities Commission SC to market at
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securities in the primary market a
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company has three choices first a public
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offering in which the company offers its
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securities for sale to the general
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public
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second a rights offering in which the
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company offers shares to existing
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shareholders on a pro-rated basis or
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third a private placement in which the
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company sells new securities directly to
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selected groups of investors such as
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insurance companies and pension funds
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secondary market the market in which
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securities are traded after they have
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been issued secondary market is also
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called the after market the secondary
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market provides way for the investors to
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sell their securities to others in the
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secondary market
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unlike the primary market the
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transaction does not involve the company
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that issued the securities instead that
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transactions happen directly between
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investors the seller sells securities
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while the buyer pays money to the seller
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as such secondary markets play two
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important roles first the secondary
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market provides liquidity to the
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security purchasers next secondary
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market provides continuous pricing
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mechanism for the securities to reflect
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their value at any point in time on the
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basis of the best available information
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for the trading of securities there are
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two types of forums for buyers and
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sellers in secondary markets organized
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securities exchanges are the centralized
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institutions in which the forces of
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supply and demand for outstanding
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securities are brought together these
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exchanges are auction markets in which
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the price is determined by the flow of
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buy and sell orders
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however the over-the-counter OTC market
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is a widely scattered telecommunications
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network for the transactions for the
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buying and selling of securities the OTC
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market uses a quote system which is
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based on negotiation and dealer quotes
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to determine the price
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conditions and the securities markets
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are commonly classified as bull market
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or bear market depending on the
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securities prices at a rising or falling
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over time changing market conditions are
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generally caused by the changes in
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investor attitudes changes in economic
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activity and government policies to
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stimulate or to slow down the economic
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activity bull markets are favorable
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markets normally associated with rising
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prices investor and consumer optimism
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economic growth and recovery and
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government stimulus in general during a
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bull market investors earn higher
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returns and share investments while bear
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markets are unfavorable markets normally
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associated with falling prices investor
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and consumer pessimism economic slowdown
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and government restraint when an
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investor places in order to buy or to
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sell a stock there are two fundamental
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execution options place the order at
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market or at limit market orders are the
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orders to buy or sell shares at the
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present market price when order is
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placed this is the fastest way to fill
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order so if the share price is now $10
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per share when you place a market order
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to buy you will buy the shares at $10
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per share however a limit order sets the
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maximum or minimum price at which you
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are willing to buy or sell for example
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if the current market price of the share
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is $6 per share you may place a limit
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order to buy the shares of $5 per share
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the limit order will be executed only
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when price drops to $5 so if the price
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limits are not met order is not filled
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stop-loss orders this is an order to
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sell a share when its market price
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reaches or drops below a specified price
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it is also called a stop loss or stop
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order this is a type of limit order
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long purchase and short selling are the
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two basic types of securities
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transactions a long purchase is a
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transaction in which an investor buys
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and holds the securities with an
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expectation that the price will rise in
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the future a long purchase is the most
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common type of transaction the objective
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is to buy low and sell high
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investors will make profit when stock
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prices go up however short selling is
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quite different when investors expect
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that the market price will drop in the
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future probably they will go for short
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selling investor sells securities they
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don't own by borrowing securities from
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the broker on the other hand broker
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lends securities owned by other
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investors that are held in street name
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so short selling transaction starts with
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a selling investor sells the shares
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first later on when price drops they
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will buy back the shares and return the
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shares to the broker a short seller must
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make an initial equity deposit with the
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broker which means in the investors
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account there must be a certain amount
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of money to be kept as collateral the
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objective is to sell high and buy low
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investors will make profit when stock
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prices go down let's take an example the
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first step short sale initiated there
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are 100 shares of borrowed stock sold at
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$50 per share
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so the proceeds from sale to investor is
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$5,000 which means the seller will
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receive $5,000 the second step short
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sale covered it happens later when
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investor purchases 100 shares of the
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stock at $30 per share and returns the
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shares to the broker so the cost to the
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investor is $3,000 that's the money that
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the investor will pay by taking $5,000 -
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$3,000 the investor will make a net
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profit of $2,000 you might ask what if
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the share price goes up after the short
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selling then the investor will still
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have to buy back the shares at a higher
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price and make a loss the advantages of
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short selling chance to make profit when
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stock price declines the disadvantages
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of short selling it has limited return
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opportunities as the stock price cannot
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go below zero dollars but it has
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unlimited risk as the stock price can go
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up and in limited amount if the stock
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price goes up no matter how expensive
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the prices short seller still needs to
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buy back the shares and return the
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borrowed shares to the broker
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lastly short sellers may not earn
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dividend from the shares margin trading
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is a common way and trading securities
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investors may use borrowed funds to
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purchase securities but not on cash
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basis margin trading is used for one
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basic reason to magnify returns a bank
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broker rich company or other financial
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institution lends the investor the
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needed funds and retains the purchased
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securities as collateral the margin
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requirements are set by securities
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commission SC in which it determines the
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minimum amount of equity required let's
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take an example on $10,000 purchase with
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60% margin requirement
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it means investor will have to pay 60%
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and borrow 40% so investor will pay
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$6,000 and broker will lend the
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remaining $4,000 margin trading can be
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used for common stocks preferred stocks
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bonds mutual funds options warrants and
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futures
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for the advantages of margin trading it
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magnifies the profits because you can
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use a smaller amount of money to
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purchase the shares in other words you
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are allowed to use financial leverage
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another benefit of margin trading is
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that it allows for greater
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diversification of security holdings
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because investors can spread their
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capital over a greater number of
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investments the main disadvantage of
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margin trading of course is the
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potential for magnified losses if the
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price of the security falls and other
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disadvantages the cost of the margin
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loan investors who borrow money to
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invest will have to pay for the interest
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expense which can be quite costly the
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next one is margin call if the market
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price drops investors will be called to
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deposit more money into the margin loan
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account sometimes investors may be
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forced to sell their investments to
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repay the margin loan the following is
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an example to show you the effect of
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margin trading on security returns it is
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divided into two categories one is
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without margin means you pay 100% or
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with margins of 80% 65 percent or 50
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percent 80 percent margin means you pay
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80 percent and borrow 20 percent the
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current market price is $50 per share
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and you purchase 100 units so the cost
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of investment is $5,000 less borrowed
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money without margin it will be zero
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dollars 80 percent margin it will be
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$1000 65% margin $1,750 and 50% margin
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$2,500 so the equity and investment
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which means the portion of money that
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you pay will be $5,000
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four thousand dollars three thousand two
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hundred fifty dollars and two thousand
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five hundred dollars
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if the share price rises by $30 to $80
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per share share value will become $8,000
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original cost of investment is $5,000
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under all scenarios capital gain will be
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$3,000 but for the return on invested I
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which is calculated by taking capital
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gain over equity and investment 50%
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margin has the highest return 120% but
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with that margin the return is only 60%
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on the other hand if the share price
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falls by $30 to $20 per share now the
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share value is only $2,000 original cost
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of investment is still the same $5,000
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so you will have a capital loss of
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$3,000 based on the return on investing
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you will find that with 50% margin your
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loss is 120% but with that margin your
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loss is only 60% as a conclusion for
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using margin trading the profits and
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losses will be magnified because your
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risk exposure is higher lastly we will
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talk about the market indexes a market
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index is a hypothetical portfolio of
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investments such as common stocks which
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represents a segment of the financial
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market the calculation of the index
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value comes from the prices of the
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underlying investments stock market
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indexes measure the general behavior of
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stock prices over time these indexes
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reflect the arithmetic average price
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behavior at a given point in time they
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also measure the current price behavior
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relative to a base value set at an
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earlier point in time reasons to use
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market indexes include market indexes
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can gauge general market conditions if a
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market index goes up it means the stock
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market goes up you can compare your
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portfolio performance to a large
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diversified portfolio represented by
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market index if your portfolio return is
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10% while
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market index return is 8% then your
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portfolio performs better than the
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market market indexes can also be used
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to study market cycles trends and
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behaviors to forecast the future market
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behavior
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alright that's all for this video thanks
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for watching see you in the next one bye
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[Music]
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