Securities Firms (ch21) – Fin 331 1

Securities Firms

• Investment Banking Business

• Brokage Service

• Investment Funds– Mutual Funds– Hedge Funds

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Investment Banking

• Investment banks’ major responsibility is to assist in the initial sale of securities in the primary market, namely, underwriting stocks and bonds– Include both IPOs and seasoned offers

• Glass-Steagall Act separates commercial banking from investment banking

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Underwriting Stocks and BondsGiving Advice

When to offer?At what price?

Filing DocumentsSECRegistration statementProspectus

UnderwritingSyndicate

Tombstones

Marketing OutcomesFully subscribed Undersubscribed

Oversubscribed Best Efforts

Securities Firms (ch21) – Fin 331 4

Ten Largest Underwriters in the U.S.

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Other Investment Banking Service

• Private Placement

• Mergers and Acquisitions– Active in this market since 1960s– Serves both acquirers and target firms

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Securities Brokers and DealersBrokerage Service

a. Securities Orders Market OrderLimit Order – buy with maximum acceptable

price and sell with minimum price short sell

b. Other ServicesMargin Credit

brokage-based cash management accountc. Full-Service Brokers – provide research and investment

adviced. Discount Brokers – execute trades on request

Securities DealersMarket Makers – increase market liquidity

Securities Firms (ch21) – Fin 331 7

Box 1: Using the Limit-Order Book

Unfiled Circuit City Limit Orders

__________________________________

Buy Orders Sell Orders

37 100

37.125 300

37.25 100

37.375 200

37.50 500

37.625 100

Any deal now?

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Orders

1. 200-share market buy order

2. 300-share limit sell order at 37.125

3. 500-share limit buy order at 36.875

The order book is:

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Short-selling – borrow shares

Joel shorts 200 shares of IBM stocks at $50/share. Later on the stock price goes to $40/share. How much profit/loss Joel has made in this transaction?

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Buy-on-margin – borrow money

Amy bought 10,000 shares of IBM stocks at $50/shares with her margin account. The IBM price increases to $60 later. How much profits/losses Amy could make?

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Types of Mutual Funds

Balanced Funds

Bond Funds

Value Funds

Growth Funds

Growth and Income Funds

Index Funds

Money Market Mutual Funds

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Mutual Funds on the Rise

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Distribution of Mutual Fund Net Assets by Type of Fund

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Household Ownership of Mutual Funds

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Fee Structure of Investment Funds

Open-End Fund

Load Funds

No-Load Funds

Closed-End Fund

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Fees in addition to sales commissions

Contingent deferred sales charge

Redemption fee

Exchange fee

Account maintenance fee

12b-1 fees

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Regulations of Mutual Funds

All funds to register with the SEC

Provide two types of documents: prospectus and shareholder report (page 589)

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Calculating a Mutual Fund’s Net Asset Value

Net Asset Value (NAV)Definition: Total value of the mutual fund’s stocks, bonds, cash, and

other assets minus any liabilities such as accrued fees, divided by the number of shares outstanding.

Stocks $35,000,000Bonds $15,000,000Cash $3,000,000

Total value of assets $53,000,000Liabilities -$800,000

Net worth $52,200,000Outstanding shares 15 millionNAV =

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Hedge Funds1. Take advantage of unusual spreads between security prices2. Often highly leveraged 3. Relatively unregulated