4-1 Stock Quotes from freerealtime.com

4-4-11

Stock Quotes from freerealtime.comStock Quotes

from freerealtime.com

PHILLIPS MORRIS COS-PHILLIPS MORRIS COS-NYSE:MONYSE:MO

Bid (size)Bid (size) Ask(size)Ask(size)

19.63(1000)19.63(1000) 19.69(631)19.69(631)

Deep marketDeep market

T.ROWE PRICE ASSOC-T.ROWE PRICE ASSOC-NASDAQ NASDAQ Stock Market:TROWStock Market:TROW

Bid(size)Bid(size) Ask(size)Ask(size)

32.81(5)32.81(5) 33.13(1)33.13(1)

Relatively thin marketRelatively thin market

If you would like to buy Phillips Morris Stock, which price should you If you would like to buy Phillips Morris Stock, which price should you look at? The price under bid or under ask?look at? The price under bid or under ask?

If you would like to sell Phillips Morris Stock, which price should you If you would like to sell Phillips Morris Stock, which price should you look at? The price under bid or under ask?look at? The price under bid or under ask?

What does the size measure?What does the size measure? How do you measure the depth of the market? How do you measure the depth of the market?

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EVALUATING MARKET DEPTH How Many Buyers and Sellers?

EVALUATING MARKET DEPTH How Many Buyers and Sellers?

Round Lot:Round Lot: 100 shares of stock 100 shares of stock Bid Size:Bid Size: number of round lots sought by current number of round lots sought by current

buyers at any momentbuyers at any moment MO: Bid size 1000MO: Bid size 1000 the bid price of $19.63 is good for the bid price of $19.63 is good for

1000*100 = 100,000 shares1000*100 = 100,000 shares Ask Size:Ask Size: number of round lots for sale at any moment number of round lots for sale at any moment

MO: Ask size 631MO: Ask size 631 the ask price of $19.69 is good for the ask price of $19.69 is good for ____*100 = _______ shares____*100 = _______ shares

Measure of Price Stability:Measure of Price Stability: gauges supply and demand gauges supply and demand and identifies upward or downward pressure on priceand identifies upward or downward pressure on price

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Inverted Bid-Ask Spread Again

Inverted Bid-Ask Spread Again

Inverted bid-ask spread: The quoted bid price is Inverted bid-ask spread: The quoted bid price is higher/ lower than the quoted ask pricehigher/ lower than the quoted ask price

If the bid size is only 100 shares, an eager seller of If the bid size is only 100 shares, an eager seller of 10,000 shares might end up with accepting a lower 10,000 shares might end up with accepting a lower price. price.

Which scenario do you think that the inverted bid-ask spread most likely occur?

A. The bid size is very large compared with the ask size.

B. The bid size is very small compared with the ask size.

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ExampleStop, Stop-Loss Order


Stop-Loss OrderStop-Loss Order You own 100 shares of AOL,which is currently selling for $50 per You own 100 shares of AOL,which is currently selling for $50 per

share. share. Because you believe that the stock price could decline rapidly at any Because you believe that the stock price could decline rapidly at any

time, you place a stop-loss order to sell at $40. (You do not want to hold time, you place a stop-loss order to sell at $40. (You do not want to hold the stock anymore if its price goes below that specified price. You the stock anymore if its price goes below that specified price. You would like to stop your loss from holding that stock.) would like to stop your loss from holding that stock.)

If the stock price does in fact drop to $40, your 100 share will be If the stock price does in fact drop to $40, your 100 share will be sold at sold at the best price available at that timethe best price available at that time.. In other words, once the price falls In other words, once the price falls to the price you specified, the stop-loss order is converted to a market to the price you specified, the stop-loss order is converted to a market order to sell at the best price available.order to sell at the best price available.

Your 100 shares will be sold at the best price available at that time. If Your 100 shares will be sold at the best price available at that time. If the market price declines to $38 by the time your stop-loss order comes the market price declines to $38 by the time your stop-loss order comes up, you will receive less than $40 per share, that is, you’ll end up with up, you will receive less than $40 per share, that is, you’ll end up with selling your stock for $39 per shareselling your stock for $39 per share

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Stop-Loss OrderStop-Loss Order What happens if the market price stays above $40 per What happens if the market price stays above $40 per

share?share? You will have lost nothing as a result of placing the You will have lost nothing as a result of placing the

order because the stop order will never be initiated.order because the stop order will never be initiated.

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Stop Order to BuyStop Order to Buy An investor may place a stop order to buy 100 shares An investor may place a stop order to buy 100 shares

of MSFT, currently selling for $70 per share, once its of MSFT, currently selling for $70 per share, once its price rises to $75. (the stop price)price rises to $75. (the stop price)

When to use this type of order?When to use this type of order? Limit losses on short sales.Limit losses on short sales. Buy a stock just as its price begins to rise.Buy a stock just as its price begins to rise.

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ExampleStop-Limit Order

ExampleStop-Limit Order

Stop-Limit Order Stop-Limit Order You own 100 shares of MSFT stocks, which is currently selling for You own 100 shares of MSFT stocks, which is currently selling for

$50 per share. $50 per share.

Because you believe that the stock price could decline rapidly at any Because you believe that the stock price could decline rapidly at any time, you place a stop-limit order to sell at $40.time, you place a stop-limit order to sell at $40.

If the stock price does in fact drop to $40, your 100 share will be If the stock price does in fact drop to $40, your 100 share will be sold sold at $40 0r better. at $40 0r better.

There would be no risk of getting less than $40 unless the price of the There would be no risk of getting less than $40 unless the price of the stock kept right on falling. In that case, as is true for any limit order, stock kept right on falling. In that case, as is true for any limit order, you might miss the market altogether and end up with stock much you might miss the market altogether and end up with stock much less than $40.less than $40. Say, price from $50 to $41 to $39 and to $30; you’ll Say, price from $50 to $41 to $39 and to $30; you’ll end up with stock for $30 per share.end up with stock for $30 per share.

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MoreMore

What kind of order is it?What kind of order is it? Buy 100 shares of Walt Disney at the current ask priceBuy 100 shares of Walt Disney at the current ask price Buy 500 shares of Walt Disney at $35 or lessBuy 500 shares of Walt Disney at $35 or less

Automatically expires if it cannot be executed during the trading Automatically expires if it cannot be executed during the trading session in which it is enteredsession in which it is entered

Stays active until it is executed or canceled by the investorStays active until it is executed or canceled by the investor In some instances, broker set a time limit of 30-60 daysIn some instances, broker set a time limit of 30-60 days

Either fill the entire order or do not fill it at all Either fill the entire order or do not fill it at all Immediately fill the entire order or completely cancelled Immediately fill the entire order or completely cancelled

Why bother to use all-or-none or fill-or-kill order?Why bother to use all-or-none or fill-or-kill order? The potential for paying higher brokerage commissions on orders The potential for paying higher brokerage commissions on orders

that are executed in piecemeal fashionthat are executed in piecemeal fashion. .

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Retirement PlansRetirement Plans

Defined-benefit plans:Defined-benefit plans: Defined-contribution plans:Defined-contribution plans:

Company agrees to pay Company agrees to pay fixed dollar amount based fixed dollar amount based on years worked and salary on years worked and salary levellevel

Company assumes market Company assumes market risk on invested fundsrisk on invested funds

Employee pays in set amount Employee pays in set amount per pay periodper pay period

Employee chooses investment Employee chooses investment optionsoptions

Employee is responsible for Employee is responsible for investment performanceinvestment performance

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Dollar-Cost Averaging Again

Dollar-Cost Averaging Again

Dollar-Cost Averaging:Dollar-Cost Averaging: Strategy of investing a fixed Strategy of investing a fixed amount in a security at regular intervals; ideal for amount in a security at regular intervals; ideal for defined contribution savings plansdefined contribution savings plansIt’s a passive buy-and-hold strategy.It’s a passive buy-and-hold strategy.

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How Does Dollar-Cost Averaging Work?

How Does Dollar-Cost Averaging Work?

Invest $400 per month to buy Citi’s stock.Invest $400 per month to buy Citi’s stock. Investment horizon: 1 yearInvestment horizon: 1 year Three different market environments are shown: Three different market environments are shown:

Rising, Falling, and directionless but highly Rising, Falling, and directionless but highly volatile marketvolatile market The average cost per share is always lower than The average cost per share is always lower than

the average price per share.the average price per share.

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Rising MarketRising Market

Monthly Payment Share Price Share Purchased400 4 100400 8 50400 8 50400 10 40400 12.5 32400 12.5 32400 16 25400 20 20400 20 20400 25 16400 40 10400 40 10

Totals 4800 216 405Average Price 18 11.85185185Volatility 11.36331818

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Falling MarketFalling Market

Monthly Payment Share Price Share Purchased400 50 8400 25 16400 25 16400 20 20400 20 20400 20 20400 16 25400 16 25400 10 40400 5 80400 5 80400 4 100

Totals 4800 216 450Average Price 18 10.66666667Volatility 12.04159458

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Volatile MarketVolatile Market

Monthly Payment Share Price Share Purchased400 40 10400 25 16400 16 25400 10 40400 8 50400 4 100400 4 100400 8 50400 10 40400 16 25400 25 16400 50 8

Totals 4800 216 480Average Price 18 10Volatility 13.94632568

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Dollar-Cost AveragingDollar-Cost Averaging

FindingsFindings The more volatile the better.The more volatile the better. The average cost of shares purchased by regular investors The average cost of shares purchased by regular investors

will always be than the average share price.will always be than the average share price. Neither will dollar-cost averaging ensure a profit or Neither will dollar-cost averaging ensure a profit or

protect against a loss in declining market, nor will it protect against a loss in declining market, nor will it prevent a loss if it is discontinued when the value of an prevent a loss if it is discontinued when the value of an account is less than its cost.account is less than its cost.

The success of the dollar-cost averaging depends on The success of the dollar-cost averaging depends on the investor making regular purchases irrespective of the investor making regular purchases irrespective of the market conditions. the market conditions.

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Problem-Buying on Margin


I would like to buy 1000 shares of stock at $10 per I would like to buy 1000 shares of stock at $10 per share, but I only have $5000. How can I do? share, but I only have $5000. How can I do?

Buy on marginBuy on marginI can open a margin account with I can open a margin account with initial margin 50%.initial margin 50%. Margin Account = account that holds securities purchased Margin Account = account that holds securities purchased

with a combination of cash and borrowed fundswith a combination of cash and borrowed funds At the beginning, my margin account will have 1000 shares At the beginning, my margin account will have 1000 shares

worth at $10 per share-a combination of $5000 cash and worth at $10 per share-a combination of $5000 cash and borrowed funds $5000.borrowed funds $5000.

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If the price goes up to $20 per share, what is my If the price goes up to $20 per share, what is my margin now?margin now? I have 1000 shares worth at $20 per share now, and my I have 1000 shares worth at $20 per share now, and my

original loan to finance these 1000 shares is $5000. original loan to finance these 1000 shares is $5000. Therefore, my margin will become Therefore, my margin will become ($20000-$5000)/$20000= 75%.($20000-$5000)/$20000= 75%.

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If the price goes down to $7 per share, what is my margin If the price goes down to $7 per share, what is my margin now?now? I have 1000 shares worth at $7 per share now, and my original I have 1000 shares worth at $7 per share now, and my original

loan to finance these 1000 shares is $5000. Therefore, my loan to finance these 1000 shares is $5000. Therefore, my margin will become ($7000-$5000)/$7000= 28.57%.margin will become ($7000-$5000)/$7000= 28.57%.

If the If the maintenance margin(the absolute minimum amount of maintenance margin(the absolute minimum amount of margin (equity) that an investor must maintain in the margin margin (equity) that an investor must maintain in the margin account at all times)account at all times) is set equal to 30%, I will receive a margin is set equal to 30%, I will receive a margin call from my broker to bring the equity up to the initial call from my broker to bring the equity up to the initial margin level within 3 business days. If not brokerage will margin level within 3 business days. If not brokerage will liquidate position to bring account’s equity back up to 50%.liquidate position to bring account’s equity back up to 50%.

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Stock purchases with 50% initial margin trigger a 30% Stock purchases with 50% initial margin trigger a 30% maintenance margin call following a ____% decline in price.maintenance margin call following a ____% decline in price. Initial purchase price:PInitial purchase price:P00 Margin debt = 0.5* PMargin debt = 0.5* P00 To ensure 30% initial margin, total debt must be less than or To ensure 30% initial margin, total debt must be less than or

equal to 70% of the current market price,P, of any stock equal to 70% of the current market price,P, of any stock purchased on margin. That is, Debt purchased on margin. That is, Debt 0.7*P 0.7*P

0.5* P0.5* P00 0.7*P 0.7*P 0.5/0.7 0.5/0.7 P/ P P/ P00 0.714 0.714 P/ P P/ P00 0.714 0.714 must be less than or equal to the ratio of the current market must be less than or equal to the ratio of the current market price divided by the initial purchase price. Alternatively, a price divided by the initial purchase price. Alternatively, a stock purchased with 50% initial margin could fall by as stock purchased with 50% initial margin could fall by as much as 28.6% (=(P- Pmuch as 28.6% (=(P- P00)/ P)/ P00 =(0.714 P =(0.714 P00 - P - P00)/ P)/ P00

=-0.286 P=-0.286 P00 / P / P00 =-0.286=-28.6%) =-0.286=-28.6%)

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Buying on Margin-Summary Table 4.4 Panel A

Buying on Margin-Summary Table 4.4 Panel A

Stock Price Investor Equity Required Equity with 30% Initial margin Excess Equity(Deficiency)$5 $0 $1,500 ($1,500)$6 $1,000 $1,800 ($800)$7 $2,000 $2,100 ($100)$8 $3,000 $2,400 $600$9 $4,000 $2,700 $1,300

$10 $5,000 $3,000 $2,000$11 $6,000 $3,300 $2,700$12 $6,000 $3,600 $2,400$13 $7,000 $3,900 $3,100$14 $7,000 $4,200 $2,800$15 $8,000 $4,500 $3,500

Investment results with an initial purchase of 1,000 shares at $10 using 50% initial margin.

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More Practice-Buy on MarginMore Practice-Buy on Margin

If the initial margin requirement is 40%, an If the initial margin requirement is 40%, an investor buying 100 shares at $100 per share investor buying 100 shares at $100 per share must furnish equity of _______must furnish equity of _______ Initial purchase price * shares purchased * initial Initial purchase price * shares purchased * initial

margin = margin =

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More Practice-Buy on Margin

More Practice-Buy on Margin

The purchase of a stock at 50 with 50% initial The purchase of a stock at 50 with 50% initial margin would result in a margin call (for 30% margin would result in a margin call (for 30% initial margin) if the stock falls in price to_____initial margin) if the stock falls in price to_____ Margin debt = 0.5* PMargin debt = 0.5* P00 Margin debt = Margin debt =

To ensure 30% initial margin, total debt must be less than To ensure 30% initial margin, total debt must be less than or equal to 70% of the current market price,P, of any stock or equal to 70% of the current market price,P, of any stock purchased on margin. That is, Debt purchased on margin. That is, Debt 0.7*P 0.7*P

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How to Profit from Falling PricesHow to Profit from Falling Prices

How can an investor profit from the impending How can an investor profit from the impending decline in a company’s stock price if he/she decline in a company’s stock price if he/she does not presently own companies with poor does not presently own companies with poor and deteriorating fundamentals?and deteriorating fundamentals?

Short sale Short sale

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SELLING SHORTSELLING SHORT Sale of borrowed stock on marginSale of borrowed stock on margin ““Cover the short”: returning borrowed shares after Cover the short”: returning borrowed shares after

repurchaserepurchase Short sales expose trader to unlimited upward riskShort sales expose trader to unlimited upward risk

Shorted stock skyrocketsShorted stock skyrockets Cost of margin calls to maintain shortCost of margin calls to maintain short

Short interestShort interest(number of shares sold short)(number of shares sold short) ——bearish bearish sentiment for issuesentiment for issue

Short interest ratio: Short interest ratio: short interest expressed in terms of short interest expressed in terms of % % of day’s trading volume; of day’s trading volume; number of shares sold short number of shares sold short relative to the daily trading volume in a stockrelative to the daily trading volume in a stock HighHigh bullish/ bearish sentiment? bullish/ bearish sentiment?

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Margin Call Risk For Short Sellers


1.153 P/PO1.153 P/PO

after simplificationafter simplification

Debt = Initial Debt + Debt= (P – 0.5PO) + (P – PO)

Initial margin 50%, maintenance margin 30%

Debt = 2P – 1.5PO

Debt 0.7P

Debt = 2P – 1.5PO

Debt 0.7P

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The current market price of a stock sold short The current market price of a stock sold short can be no more than 15.3% highercan be no more than 15.3% higher(=(P- P(=(P- P00)/ P)/ P00

=(1.153 P=(1.153 P00 - P - P00)/ P)/ P00

0.153 P0.153 P00 / P / P00 =.153=15.3%) than the original price before a =.153=15.3%) than the original price before a

30% maintenance marginal call is triggered. 30% maintenance marginal call is triggered.

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Selling Short on Margin-Summary Table 4.4 Panel B

Selling Short on Margin-Summary Table 4.4 Panel B

Stock Price Investor Equity Required Equity with 30% Initial margin Excess Equity(Deficiency)$5 $10,000 $1,500 $8,500$6 $9,000 $1,800 $7,200$7 $8,000 $2,100 $5,900$8 $7,000 $2,400 $4,600$9 $6,000 $2,700 $3,300

$10 $5,000 $3,000 $2,000$11 $4,000 $3,300 $700$12 $3,000 $3,600 ($600)$13 $2,000 $3,900 ($1,900)$14 $1,000 $4,200 ($3,200)$15 $0 $4,500 ($4,500)

Investment results with an initial short sale of 1,000 shares at $10 using 50% initial margin.

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Problem-Short SaleProblem-Short Sale

A short sale of 1,000 American Online at 65 A short sale of 1,000 American Online at 65 that is covered at 60 results in a total :that is covered at 60 results in a total : Proceeds from short sale:Proceeds from short sale: Cost to buy back stocks:Cost to buy back stocks: Results:Results:

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Prescriptions For Limiting Short-Selling Risk

Prescriptions For Limiting Short-Selling Risk

TimingTiming

Careful selectionCareful selection

Limit short positions to no more Limit short positions to no more than 20% of portfoliothan 20% of portfolio

Disciplined tradingDisciplined trading——limit losses to limit losses to 20% price appreciation20% price appreciation

4-1 Stock Quotes from freerealtime.com

Business

initial purchase

margin call

current market

loss order

margin call

short sale

50 initial

initial margin