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Chapter 10:SECURITIES MARKETS

Trading Financial Resources

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SECURITIES MARKETS

Stocks & Bonds

Primary Securities

MarketInvestors Corporations

Funds

Securities

Debt & Equity

Long term financing

Additional Funds Support:· Expansion of facilities· Research and Product

Development· Adoption of New

Technologies· Other strategic initiatives

Returns to Investors:Dividends, Interest,

Capital Gains

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COMMON STOCK: A SHARE OF CORPORATE OWNERSHIP

• Voting Rights

• Right to Dividends

• Capital Gains

• Preemptive Rights

• Right to Residual Claim on Assets

The basic form of ownership is a corporation

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PREFERRED STOCK

• Stock that gives its holder preference over common stockholders.– No Voting Rights– Claim on Assets– Payment of Dividends– Cumulative Feature

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THAT’S SOME CLASSY STOCK!

• Some corporations issue more than one class of common stock.

• Google has two classes of common stock. – Class A stock is actively traded– Class B shares are not traded and are all held by

a small group of investors, including Google’s chief executive officer and co-founders

• Class A stock has 1 vote, but each share of Class B stock has 10 votes.

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BONDS: A FORMAL IOU

• Long-term debt issued by a corporation or government– Maturity Date– Par Value– Coupon Rate

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CHARACTERISTICS OF BONDS

• Most bonds are secured with a pledge of specific assets

• Methods of retiring bonds:– Serial bonds have unique maturity dates and help spread out

repayments

– Companies may establish sinking fund to assist in repayment

• Callable bonds have provisions for early redemption

• Convertible bonds allow bonds to be transferred into shares of common stock

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JUNK BONDS

• Junk bonds are bonds that are rated Ba or lower in Moody’s classification

• Junk bonds offer a higher rate of interest.

• In December, 2006, Delta Airlines, Ford Motor Company, and General Motors all had bond issues that were in the junk bond category.

• The Wall Street Journal tactfully refers to these securities as “high yield bonds.”

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TRADING SECURITIES: THE SECONDARY MARKET

• Security Exchanges– New York Stock Exchange

• Traditionally an “auction market”

– NASDAQ• Electronic exchange

• Over the Counter Market• Electronic Communication Networks

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NEW YORK STOCK EXCHANGE

The largest securities exchange in the United

States. It is typically referred to as NYSE.

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HYBRID MARKET

• Response to customer demands, new regulations and growth in transaction size

• Brokers can participate both physically and electronically on the trading floor

• NYSE+ Direct is the technology that has been expanded for the Hybrid Market

NYSE Hybrid Market - a new trading system to allow investors to execute trading through an automated trading system as well as on the floor.

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NASDAQ

A major stock exchange that handles trades

through a computerized

network

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COMPARING THE EXCHANGES

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PERSONAL INVESTING

What are your short-term and long-term goals?

How much are you able to invest?

How concerned are you about the tax implications?

How much tolerance do you have for risk?

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FULL SERVICE VS DISCOUNT BROKERS

• Individuals must use a broker to trade stocks on the organized exchanges and OTC market

• Full Service Brokers– Provide a range of services like

research, advice and tax planning• Discount Brokers

– Basic buy/sell capabilities• The competition between brokers is

intense and both attempt to offer more services.

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DIRECT STOCK PURCHASE PLANS

• Many Corporations offer Direct Stock Purchase Plans

• Purchase stock direct from company

• Dividend Reinvestment Plans (DRIPS) allow current stockholders to reinvest dividends to purchase additional stock

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STRATEGIES FOR INVESTING IN SECURITIES

• Investing for Income

• Market Timing

• Value Investing

• Investing for Growth

• Buying and Holding

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OTHER SECURITIES-RELATED INVESTMENTS: MUTUAL FUNDS

• Diversification

• Relatively Low Cost

• Professional Management

• Variety

• Liquidity

• Diversification

• Relatively Low Cost

• Professional Management

• Variety

• Liquidity

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KEEPING TABS ON THE MARKET: STOCK INDICES

Stock Index – tracks how the prices of a

specific set of stocks have changed.

Dow Jones Industrial Average (DJIA) – most widely followed index. Tracks 30 stocks picked by the Wall Street Journal editors.

Standard and Poor’s 500 – tracks 500 stocks and weighs the total market value of each stock.

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STOCK QUOTES ONLINE

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PLAN YOUR INVESTMENT STRATEGY

• Besides diversification, how can investors reduce their risk?

• What resources are available to investors to manage their investments?

• Would you personally consider hiring a broker?