© 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?