EQUITY RESUMEN:

READING 44:

Assets can be classified as securities, currencies, contracts, commodities, and real

assets. Their characteristics and subtypes are as follows.
SECURITIES
Securities can be classified as fixed income or equity securities, and individual
securities can be combined in pooled investment vehicles.

debt
Fixed Income
securitues

common
Securities
stock

Equity preferred Mutual funds

currencies
securities stock

option warrants ETFs

pooled
investment
swaps vehicles
assets backed
Assets contracts securities
futures
commodities
hedge funds
forwards

real state

real assets equipment

machinery
7

Ayuda al cliente a
Block broker encontrar una contraparte
Broker
investment bank

facilitate trading by buying for or selling

Dealer
from their own inventory

Exchange provide a venue where traders can meet

creates a diversified pool of assets with

securitizers more predictable cash flows than the
Financial individual assets in the pool
Intermediaries
depository Banks
institutions credit unions

they collect insurance premiums in

Insurance
return for providing risk reduction to the
company
insured.

arbitrageurs

clearing houses
Leveraged Positions

Investors who use leverage to buy securities by borrowing from their brokers are
said to buy on margin and the borrowed funds are referred to as a margin loan.
The interest rate paid on the funds is the call money rate, which is generally
higher than the government bill rate.
The use of leverage magnifies both the gains and losses from changes in the value
of the underlying asset. The additional risk from the use of borrowed funds is
referred to as risk from financial leverage.

The leverage ratio of a margin investment is the value of the asset divided by the
value of the equity position.
Traders who post bids and offers are said to make a market, while those who
trade with them at posted prices are said to take the market.

ORDERS TYPES:
When investors want to buy or sell, they must enter orders that specify the size of
the trade and whether to buy or sell. The order can also include execution
instructions that specify how to trade, validity instructions that specify when the
order can be filled, and clearing instructions that specify how to settle the trade.

Execution

Orders: Type Validity

specify how to
Clearing
settle the trade.
 EXECUTION

execute the trade

Market order
immediately

places a minimum execution price

Limit order on sell orders and a maximum
execution price on buy orders

Execution
All or nothing execute only if the whole order
can be filled.

Hidden orders only the broker or exchange knows

the trade size

display size some of the trade is visible to the market, but the rest is
not. These are also referred to as iceberg orders

A limit buy order above the best ask or a limit sell order below the best bid are said Commented [B1]: El menor precio del que l market
maker ofrece para vender el instrumento.
to be marketable or aggressively priced because at least part of the order is
Commented [B2]: El mayor precio que le market maker
likely to execute immediately. If the limit price is between the best bid and the best ofrece para comprar el instrumento.
ask, a limit order is said to be making a new market or inside the market. Limit
orders waiting to execute are called standing limit orders.
A limit buy order at the best bid or a limit sell order at the best ask are said to
make
the market. Again, the order might not be filled. A buy order with a limit price
below the best bid, or a sell order with a limit price above the best ask, is said to be
behind the market. It will likely not execute until security prices move toward the
limit price. A limit buy order with a price considerably lower than the best bid, or a
limit sell order with a price significantly higher than the best ask, is said to be far
from the market.

VALIDITY
 Day orders

Good-till cancelled
orders

Immediate-or-cancel
specify when (fill or kill)
an order
Validity should be
executed
Good-on-close

good-on-open

Stop sell order

Stop Orders

Stop buy order

• Stop Orders:
Those that are not executed unless the stop price has been met. A stop order
is placed when an investor or trader wants an order to be executed after a
security reaches a specific price.

A buy stop order is entered at a stop price above the current market price. A
sell stop order is entered at a stop price below the current market price. Let’s
consider an investor who purchased AAPL for $145. The stock is now trading at
$175, however, to limit any losses from a plunge in the stock price in the future,
the investor places a sell order at a stop price of $160. If an adverse event
occurs, causing AAPL to fall, the investor’s order will be triggered when prices
drop to the $160 mark.

A stop order becomes a market order when it reaches the stop price.

MATKET STRUCTURES:
 Securities markets may be structured as call markets or continuous markets. In
callmarkets, the stock is only traded at specific times.

traders transact with dealers (market

makers) who post bid and ask prices.
Dealers maintain an inventory of
securities. Quote-driven markets are thus
Quote-Driven Markets sometimes called dealer markets, price-
driven markets, or overthe- counter
markets.

rules are used to match buyers and

MARKET STRUCTURES Order-Driven Markets sellers

brokers find the counterparty in order to

Brokered Marketsdisplay size execute a trade

READING 45
A security market index is used to represent the performance of an asset class,
security market, or segment of a market.

price index
Index
return return
index
WEIGHTING METHODS
 Dow Jones Industrial Average
(DJIA) and

arithmetic average of the

price weighting prices of the securities
included in the index

the Nikkei Dow Jones Stock

Average

arithmetic average return of

the index stocks and, for a
given time period, would be Value Line Composite
equal weighting, matched by the returns on a Average and the Financial
portfolio that had equal Times Ordinary Share Index
dollar amounts invested in
each index stock

weights based on the market

The Standard and Poor’s 500
market capitalization capitalization of each index
(S&P 500) Index Composite is
WEIGHTING METHODS weighting (or value-weighted stock as a proportion of the
an example of a market
index) total market capitalization of
capitalization-weighted index.
all the stocks in the index

is constructed like a market

capitalization-weighted
index. The weights, however,
float-adjusted market
are based on the
capitalization weighting
proportionate value of each
firm’s shares that are
available to investors

uses weights based on firm

fundamentals, such as
earnings, dividends, or cash
flow. It will actually have a
Fundamental weighting value tilt, overweighting
firms with high value-based
metrics such as book-to-
market ratios or earnings
yields.
EXAMPLES WEIGHTING METHODS:

PRICING

Promedio de los
WEIGHTING
EQUAL retornos de cada
METHODS
stock.

MARKET ,
USES OF SECURITIE MARKET INDEXES:
 Reflection of
market
sentiment.

Benchmark of
manager
performance.

Measure of
Uses of securitie
market return
market index
and risk

Measure of beta
and risk-adjusted
return.

Model portfolio
for index funds.

EQUITY MARKET INDEX TYPES:

Broad market Provides a measure of a market’s overall

Wilshire 5000
index. performance and usually contains more
Index
than 90% of the market’s total value

MSCI World Index

Typically constructed from the indexes of
Multi-market markets in several countries and is used to
index. measure the equity returns of a geographic
region Latin America
indexes

EQUITY MARKET
INDEX TYPES:
Uses market capitalizationweighting for the
Multi-market index with country indexes but then weights the
fundamental weighting. country index returns in the global index by
a fundamental factor

Measures the returns for an

Sector index. industry sector such as health
care, financial, or consumer
goods firms

Measures the returns to market

Style index. capitalization and value or growth
strategies.

Issues with the construction of fixed income indexes:

 The fixed income security universe is much
broader than the universe of stocks.

Large universe of
Illiquidity, transactions
securities.
costs, and high turnover of constituent
securities make it both difficult and
expensive for fixed income portfolio
issues with the construction of
managers to replicate a fixed income
fixed income index.
indexes:

Fixed income securities are primarily

Dealer markets and traded by dealers, so index providers
infrequent trading. must depend on dealers for recent
prices.

Indexes representing alternative investments.

represent futures
contracts on commodity Research
Commodity
indexes
commodities such as Bureau Index and the
grains, livestock, metals, S&P GSCI
and energy.

can be constructed using

Indexes representing returns based on
appraisals of properties,
alternative Real estate
repeat property sales, or
investments indexes
the performance of Real
Estate Investment Trusts
(REITs)

equally weight the returns of the

hedge funds included in the
index. Hedge funds are largely
hedge funds.
unregulated and are not
required to report their
performance to index providers.