Rebalancing Rebalancing refers to adjusting the weights of the constituent securities in the index. To maintain the weight of each security consistent with the index’s weighting method, the index provider rebalances the index by adjusting the weights of the constituent securities on a regularly scheduled basis (rebalancing dates)—usually quarterly. Rebalancing is necessary because the weights…
Constructing and managing a security market index is similar to constructing and managing a portfolio of securities. Index providers must decide the following: Target Market and Security Selection The first decision in index construction is identifying the target market, market segment, or asset class that the index is intended to represent. The target market may…
A security market index represents a given security market, market segment, or asset class. Most indexes are constructed as portfolios of marketable securities. The value of an index is calculated on a regular basis using either the actual or estimated market prices of the individual securities, known as constituent securities, with the index. For each…
The objectives of market regulation are to:
The financial system allows traders to solve financing and risk management problems. In a well-functioning financial system: If the assets or contracts needed to solve these problems are available to trade, the financial system has complete markets. If the costs of arranging these trades are low, the financial system is operationally efficient. If the prices of the…
Trading Sessions Markets are organised as call markets or as continuous trading markets. In a call market, trades can be arranged only when the market is called at a particular time and place. In contrast in a continuous trading market, trades can be arranged and executed anytime the market is open. Execution Mechanisms The three main types…
When issuers first sell their securities to investors, practitioners say that the trades take place in the primary markets. An issuer makes an initial public offering (IPO)—sometimes called a placing—of a security issue when it sells the security to the public for the first time. A seasoned security is a security that an issuer has already issued. If…
Validity instructions indicate when an order may be filled. The most common validity instruction is the day order. A day order is good for the day on which it is submitted. If it has not been filled by the close of business, the order expires unfilled. Good-till-concelled orders (GTC) are just that. In practice, most brokers…
The borrowed money is called the margin loan, and they are said to buy on margin. The interest rate that the buyers pay for their margin loan is called the call money rate. The initial margin requirement is the minimum fraction of the purchase price that must be trader’s equity. The relation between risk and…
People generally solve their financial and risk management problems by taking positions in various assets or contracts. A position in an asset is the quantity of the instrument that an entity owes or owns. A portfolio consists of a set of positions. People have long positions when they own assets or contracts. People have short…