chapter 10:securities markets - robertleecannon.com• how are securities issued in the primary...

© 2009 South Western, a division of Cengage Learning

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Chapter 10:SECURITIES MARKETS

Trading Financial Resources


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LOOKING AHEAD

• What are the different types of securities issued by a corporation?

• How are securities issued in the primary market and traded in the secondary market?

• How do the government and private organizations regulate securities markets?

• What are the different types of investment strategies that investors follow?

• What are the appeals of mutual funds and exchange traded funds?

• How can investors track the performance of their investments?


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SECURITIES MARKETS

Stocks & Bonds

Primary Securities

Market

Investors 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 PRIMARY MARKET

• Public Offering

– Initial Public Offering (IPO)

– Select an Investment bank

– Prepare paperwork

– Arrange for financing

– Carry out the offer

• Private Placement

– Quicker, simpler, less expensive

– Investment bank assistance

– No SEC registration

– Only available to accredited investors


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INVESTMENT BANKS

• Financial Intermediary

• Assists firm with IPO

– Planning

– Marketing

– Assessment

• Determining how to structure the IPO is key role of Investment Banks


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THE COLORFUL LANGUAGE OF THE STOCK MARKET

Red Herring: a preliminary Prospectus that contains a

disclaimer printed in bold red ink stating that it does not represent

an offer to sell the securities.

Green Shoe Option: an arrangement allowing an

investment bank to issue more shares during a public

offering than originally authorized.

Pink Sheet Stocks: stocks in very small companies that are publicly traded. In the past, the prices of

these stocks were printed onpinks sheets of paper.

Black Tuesday: October 29,1929, stock

prices crashed, ushering ina prolonged slump in the

performance of stock prices.


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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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REGULATIONS OF SECURITIES MARKETS:

• State Regulations

• Federal Legislation– Securities Act 1933

• Require firms to file registration when issuing stock

– Securities Exchange Act of 1934

• Securities and Exchange Commission– Established report filing

– Registration of brokers and dealers

– Prosecution power

• Individual and Company Fraudulent Activity (i.e. insider trading)


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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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BUYING SECURITIES

Market Orders – buy or sell a security

at the current market price

Limit Orders – Place limits on the price

at which orders are executed


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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


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OTHER SECURITIES-RELATED INVESTMENTS: ETFS

• ETFs are a hybrid investment

• Combines characteristics of a stock with

characteristics that are similar to a mutual

fund

• Represents ownership in a “market basket” of securities

• You can buy and sell ETFs any time of the day, unlike Mutual Funds


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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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LOOKING BACK

• What are the three types of securities issued by a corporation?

• How are securities issued in the primary market and traded in the secondary market?

• How do the government and private organizations regulate securities markets?

• What are the different types of investment strategies that investors follow?

• What are the appeals of mutual funds and exchange traded funds?

• How can investors track the performance of their investments?

chapter 10:securities markets - robertleecannon.com• how are securities issued in the primary...

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