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Financial Markets Overview
 

Financial Markets Overview

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Need a quick overview of how financial markets work? This presentation is taken from my book: "Figuring Out Wall Street" and is one of several presentations prepared for seminars on stock markets, ...

Need a quick overview of how financial markets work? This presentation is taken from my book: "Figuring Out Wall Street" and is one of several presentations prepared for seminars on stock markets, investing and financial planning. If you would like a copy, drop me an email at floyd@floydsaunders.com. We develop training for the financial services industry, contact us for details or a quote on your needs.

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  • A market is a public place where products or services are sold, either directly or through intermediaries. Markets are important for a number of reasons: They provide a place (either physical or virtual) for the trading of goods or services. They provide for competition so that the best price may be found (this is called price discovery). They provide liquidity.
  • Money Market – Short-term, high quality debt securities are traded here. These securities carry little or no default risk and have very little price risk due to their short maturities. Capital Market – Long-term securities trade in the capital markets. These securities are subject to significant price risk, default risk, purchasing power risk, etc. due to their longer maturities.
  • The NYSE handles a small percentage of its volume electronically, while the NASDAQ is completely electronic. The electronic markets use vast computer networks to match buyers and sellers, rather than human brokers. Electronic trading is efficient and fast. Many large institutional traders, such as pension funds, mutual funds, and so forth, prefer this method of trading. As much as 70% of all trading on a given day is now done as an electronic trade. Instant confirmation of your trades. It also facilitates further control of online investing by putting you one step closer to the market. You still need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.
  • Fundamental analysis Based on the assumption that a stock ’s intrinsic or real value is determined by the company’s future earnings. Fundamentalists consider the… Financial strength of the company. Type of industry company is in. New-product development. Management talent Economic growth of the overall economy. Also revenues, earnings, return on equity, profit margins and other financial data to determine a company ’s real value. (Think Warren Buffett). Buffett’s approach: Consistently good performance Low overall deb (good cash flows) High and increasing profits Listed for at least 10 years Market leader for products Undervalued by 25% compared to the market price
  • Notes: The Philadelphia Stock Exchange was the first securities exchange in the U.S. Founded in 1790.
  • The buttonwood tree fell on June 14, 1865 in a storm. Construction of The wall that gave Wall Street its name was begun on 13 March 1653, only a month after the City Council was founded under a charter issued by the Dutch West India Company. (Wall Street Journal, 14 March 2003, p. C5).
  • Nasdaq stocks normally have a 4-letter ticker symbol. However, they sometimes have a 5 th with a special meaning (note that mutual funds always have 5-letter tickers which end in X). Here they are: A - Class A B - Class B C - Issuer qualifications exceptions* D - New E - Delinquent in required filings with the SEC F - Foreign G - First convertible bond H - Second convertible bond, same company I - Third convertible bond, same company J - Voting K - Nonvoting L - Miscellaneous situations, such as depositary receipts, stubs, additional warrants, and units M - Fourth preferred, same company N - Third preferred, same company O - Second preferred, same company P - First preferred, same company Q - Bankruptcy Proceedings R - Rights S - Shares of beneficial interest T - With warrants or with rights U - Units V - When-issued and when distributed W - Warrants Y- ADR (American Depositary Receipt) Z - Miscellaneous situations such as depositary receipts, stubs, additional warrants, and units. * The letter "C" as a fifth character in a security symbol, indicates that the issuer has been granted a continuance in Nasdaq under an exception to the qualification standards for a limited period.

Financial Markets Overview Financial Markets Overview Presentation Transcript

  • The Beginning Investor Series. Figuring Out Financial Markets SeminarA simple guide to investing in financial securities and how financial markets work. Saunders Learning Group, LLC May 2012
  • Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at floyd@floydsaunders.com for more information. Saunders Learning Group, LLC, Andover, KS2
  • All About Figuring Out Wall Street ... Everything has changed in the financial services industry and it affects your financial well-being. From bank failures, to record unemployment, home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone from first time investors to veterans of banking understand what to do to persevere and restore our faith in our financial systems.Published by Saunders Learning Group.Training for financial professionals and consumers. If your interest is financial turn toSaunders Learning Group for your training needs.Contact information: email: floyd@floydsaunders.com mobile: 316-680-6482 Saunders Learning Group, LLC, Andover, KS 3
  • Stock Market Defined  The Stock Market refers to equities where actually stocks and derivatives are traded.  In the U.S.A. we think the stock market is the New York Stock Exchange on Wall Street.  But it also includes the over-the-counter market, NASDQ and regional exchanges.  The New York Stock Exchange may have stocks listed that are listed on other major stock markets.  In fact there are major Stock Markets in Hong Kong, Hamburg, London, Paris, Canada, Japan, India and others that influence one another and impact the financial markets around the global.  A company headquartered in Amsterdam may be listed on multiple stock exchanges.  Many foreign organized companies are listed on the New York Stock Exchange.  There is a tremendous value for foreign companies to be listed on an exchange in the U.S. The exposure and knowledge of a foreign company has a face on the New York stock market. An example would be a China stock, Baidu. This information and search company has grown in leaps and bounds since it being listed on the New York market. Saunders Learning Group, LLC, Andover, KS
  • Financial Exchanges  An organized market for trading stocks, bonds, options, futures, money market funds, commodities and other securitiesWall Street, the symbolic home of American Capitalism Saunders Learning Group, LLC, Andover, KS
  • Securities Exchanges A marketplace where member brokers who represent investors, meet to buy and sell securities. The securities sold at an exchange must be listed, or accepted for trading, at the exchange. The Over-the-Counter (OTC) market. — Network of dealers who buy and sell the stocks of companies not listed on a securities exchange. — Most OTC securities are traded over the NASDAQ which is an electronic marketplace for approximately 2,700 stocks. Saunders Learning Group, LLC, Andover, KS
  • What is a Market?A market is a public place where products or services are sold, either directly or throughintermediaries. To get a sense for the relative size of global financial markets, review the view of the worldwide web in terms of financial assets. Saunders Learning Group, LLC, Andover, KS
  • Money vs. Capital Markets Money Market – Short-term, high quality debt securities are traded here. Capital Market – Long-term securities trade in the capital markets. Saunders Learning Group, LLC, Andover, KS
  • Stock Market Defined  The Stock Market refers to a place where actually stocks, bonds, derivatives, options, futures, and other securities are traded.  In the U.S.A. we think the Stock Market is the New York Stock Exchange on Wall Street.  In fact there are major Stock Markets in Hong Kong, Hamburg, London, Paris, Canada, Japan, India and others that influence one another and impact the financial markets around the global.  The New York Stock Exchange may have stocks listed that are listed on other major Stock Markets.  A company headquartered in Amsterdam may be listed on multiple stock exchanges.  Many foreign organized companies are listed on the New York Stock Exchange.  There is a tremendous value for foreign companies to be listed on an exchange in the U.S. The exposure and knowledge of a foreign company has a face on the New York Stock Market. An example would be a China stock, Baidu. This information and search company has grown in leaps and bounds since it being listed on the New York Market. Saunders Learning Group, LLC, Andover, KS
  • U.S. Stock ExchangesThe Stock Market is basically a place where buyers and seller of a piece of a company cometogether and in the process the company hopefully raises some cash or other value. In the United States the New York Stock Market is comprised of the NASDAQ, NYSE and the newly created combination of the NYSE Group with Euronext in April, 2007. The Euronext holding company is a synergy between Paris and the NYSE whose history goes back to 1792. The Euronext is a combination of derivatives, currency and equities. Saunders Learning Group, LLC, Andover, KS
  • How the Stock Market Works Role of the market is to facilitate exchange between buyers and sellers 2 types of exchanges in the U.S.: physical(NYSE), virtual (NASDAQ) NYSE: Place and order through your broker, firm send order to the floor, which goes to a specialist. Price determined at an auction. NASDAQ: An Over The Counter market: no central location, trade done through network of dealers. Saunders Learning Group, LLC, Andover, KS
  • Primary and Secondary Markets Primary market.  A market in which an investor purchases financial securities through an investment bank, or other representative, from the issuer of those securities.  An investment bank is a financial firm that assists corporations in raising funds, usually by helping to sell new security issues.  An IPO occurs when a corporation sells stock to the general public for the first time. Secondary market. — A market for existing financial securities that are currently traded among investors through brokers. Saunders Learning Group, LLC, Andover, KS
  • Primary vs. Secondary Markets Saunders Learning Group, LLC, Andover, KS
  • Organized vs. OTC Markets Organized Markets Over the Counter MarketsOrganized markets are Over the Counter (OTC) marketsthose which have a physical do not have physical locations. Instead, they are characterizedlocation where all trading by networks of dealers who aretakes place. For example, connected by telephone orthe NYSE, Amex, and computer networks. The Nasdaqregional exchanges are is an example of an OTC market.organized markets. Saunders Learning Group, LLC, Andover, KS
  • Stock Markets Listing RequirementsEach market has its own listing requirements: Saunders Learning Group, LLC, Andover, KS
  • Who Regulates the Securities Markets?CongressSecurities and ExchangeCommissionRegisterssecurities (stocksand bonds).Licenses brokers.Prosecutes for stock fraudand insider trading.Individual StatesCommodities FuturesTrading Commission(CFTC) NYSEOther Self-RegulatoryOrganizationsBrokerage Firms Saunders Learning Group, LLC, Andover, KS
  • Electronic Trading The NYSE handles a small percentage of its volume electronically, while the NASDAQ is completely electronic. The electronic markets use vast computer networks to match buyers and sellers, rather than human brokers. Electronic trading is efficient and fast. As much as 70% of all trading on a given day is now done electronically. Instant confirmation of your trades. You still need a broker to handle your trades. Saunders Learning Group, LLC, Andover, KS
  • Stock Transactions  Transactions done on phone or online.  Brokerage firms have minimum commissions for trading stock, from $7 to $55, depending of the number of shares sold and the value of the stock.  Full-service broker would typically charge about $150 on a transaction, discount brokers $55 to $85.  Full service and discount brokers charge more than online brokerage transactions, but you make your own decisions in trading online. Saunders Learning Group, LLC, Andover, KS
  • Stock Transactions Market order: Request to buy or sell stock at the current market value. Limit order: Request to buy or sell a stock at a specified price. Stop order: Request to sell a stock at the next available opportunity after its market price reaches a specified amount. Discretionary order: Account executive decides when to execute the transaction and at what price. Saunders Learning Group, LLC, Andover, KS
  • What are Stocks?  Share in the Ownership of a Company  Claim in the company’s assets and earnings  One vote per share to elect board member  Stocks are probably the most important and common items traded in the stock market.  These are actually shares of certain companies, which are publicly sold and traded.  Whenever people buy a portion of stock in a particular company, this means that they acquire a share of ownership and investing in that specific business.  Through this, a stockholder is given certain rights towards the company such as a vote in stockholder meetings as well as his or her financial share from the company’s earnings. Saunders Learning Group, LLC, Andover, KS
  • Why a Company Issues Common Stock To raise capital to expand a business. They do not incur debt. Stockholders are investors not bankers Dividends are not mandatory. Most corporations distribute 30-70% of their earnings to stockholders. In return for investing in the company, stockholders have voting rights. Saunders Learning Group, LLC, Andover, KS
  • Why Do Investors Purchase Common Stock?  They can make money in three ways.  Income from dividends in the form of cash or additional stock.  Capital Gains - Dollar appreciation of stock value.  Possible increased value from stock splits. Saunders Learning Group, LLC, Andover, KS 14-5
  • Classification of Stock Investments Saunders Learning Group, LLC, Andover, KS
  • Classification of Stock Investments (continued) Saunders Learning Group, LLC, Andover, KS
  • Get Stock Information from the Internet  A Company’s home page has more up-to- date information than their printed materials. —Annual report, earnings, and other financial factors.  http://finance.yahoo.com allows you to conduct research on a company, and provides a stock screener to help you choose investments.  www.standardpoor.com  www.morningstar.com  www.valueline.com Saunders Learning Group, LLC, Andover, KS
  • How to Read the Newspaper Financials  In addition to online stock quotes, You can find stock quotes in newspapers such as The Wall Street Journal or Investors Business Daily. These include:  52 week high and low price.  The name of the company, and ticker symbol.  Projected annual dividend and yield percentage.  Price-earnings ratio.  Number of shares traded during the day.  The high and low price of the day.  The price paid in the close transaction of the day.  The net change from the day before. Saunders Learning Group, LLC, Andover, KS
  • Fundamental analysis  Fundamental analysis  Based on the assumption that a stock’s intrinsic or real value is determined by the company’s future earnings.  Fundamentalists consider the…  Buffett’s approach: — Consistently good performance — Low overall debt (good cash flows) — High and increasing profits — Listed for at least 10 years — Market leader for products — Undervalued by 25% compared to the market priceSaunders Learning Group, LLC, Andover, KS
  • Technical analysis  Technical analysis  Based on the assumption that a stock’s value is determined by the forces of supply and demand in the stock market as a whole.  Not based on expected earnings or the intrinsic value of a stock but rather on factors found in the market as a whole.  Chartists plot past price movements and other market averages to observe trends they use to predict a stock’s future value.Saunders Learning Group, LLC, Andover, KS
  • Efficient market theory Sometimes called the random walk theory. Based on the assumption that stock price movements are purely random. A stock’s current market price reflects its true value. It is impossible for an investor to outperform the average for the stock market as a whole over a period of time. Wall Street Journal’s “darts vs. the experts” finds sometimes experts win, sometimes not. Saunders Learning Group, LLC, Andover, KS
  • Domestic Stock Markets In the U.S. we have three major stock exchanges: — The New York Stock Exchange (NYSE) — Nasdaq — The American Stock Exchange (Amex) We also have several regional stock exchanges: — The Pacific Exchange (known mostly for options trading) — The Boston Stock Exchange — The Cincinnati Stock Exchange (all electronic, located in Chicago) — The Chicago Stock Exchange (formerly the Midwest Stock Exchange) — The Philadelphia Stock Exchange (known mostly for options trading) Small companies, or those which do not meet listing requirements may be traded on the OTC Bulletin Board or in the Pink Sheets. Saunders Learning Group, LLC, Andover, KS
  • Domestic Stock Markets (cont.) Additionally, in the past several years (mostly since 1997) many electronic communications networks (ECNs) have begun trading stocks, and some are seeking “exchange” status: —The Island —Archipelago (run by the Pacific Exchange) —Instinet —B-Trade (Bloomberg) —NexTrade —RediBook ECNs offer such advantages as lower costs, anonymity, open limit order books, and after-hours trading. Saunders Learning Group, LLC, Andover, KS
  • The NYSE History The New York Stock and Exchange Board began on 17 May 1792 under a buttonwood tree. Originally, 24 brokers signed the Buttonwood Agreement in which they agreed to trade only among themselves and at a fixed commission rate (fixed commissions were the rule until 1975). In 1817 the exchange was moved into rented rooms at 40 Wall Street. They also wrote and approved a formal constitution. In 1863, the name was changed to The New York Stock Exchange. In 1903 the NYSE moved to its current home. Today, the NYSE Group is a publicly traded company (NYSE: NYX). Saunders Learning Group, LLC, Andover, KS
  • Nasdaq History and Operation  The Nasdaq stock market began operations on 8 February 1971. Prior to that, the NASD had regulatory authority over a very fragmented OTC market.  Nasdaq originally, but no longer, stood for National Association of Securities Dealers Automated Quotation system. Unlike the NYSE and AMEX, Nasdaq is not an open outcry auction market, and does not use specialists. Instead, it uses a system of market makers. A market maker is a dealer who competes with others to get customer orders. The market maker posts his bid/ask quote on the system for all to see. Today, the Nasdaq is a publicly traded company (Nasdaq: NDAQ). Saunders Learning Group, LLC, Andover, KS
  • Differences Between Market Makers andSpecialists  The major difference between a specialist and a market maker is that a specialist is charged with maintaining an orderly market and is required to step in and buy when there are no buyers and sell when there are no sellers.  Market makers may withdraw from the market at any time, though there are rules.  There is only one specialist for an NYSE stock, but there are usually multiple market makers for Nasdaq stocks. Saunders Learning Group, LLC, Andover, KS
  • AMEX History and Operation The American Stock Exchange (Amex) was originally known as the New York Curb Market because it was based outside the NYSE and traded stocks that were not traded on the NYSE. In 1921, the Curb was moved indoors. It was renamed in 1953. The Amex is something of a poor step- child to the NYSE and has struggled some- what to survive. It has turned to technology and new products (options, ETFs, etc) to survive. In 1998 the Amex was merged with the NASD, and today operates as an independent entity within the NASD. Saunders Learning Group, LLC, Andover, KS
  • Investment Bankers When securities are sold into the primary market, firms enlist the services of investment bankers. Investment bankers provide three basic services to companies: — Advice and counsel (before and after the sale) — Underwriting — Distribution IB services also include: — Private Equity — Corporate Finance — Mergers & Acquisitions — Fairness Opinions Saunders Learning Group, LLC, Andover, KS
  • Investment Banking Functions:Advice and Counsel  Investment bankers provide important advice on security issues, such as: —Pricing —Size of the offering —Timing of the offering —Type of security (debt or equity) —Special features (callability, convertibility, coupon rate, etc)  Additionally, investment bankers often consult on issues of corporate governance, such as mergers. Saunders Learning Group, LLC, Andover, KS
  • Investment Banking Functions:Underwriting  Once the company and investment banker agree as to the type of security, pricing, etc. the issue is ready to market.  The investment banker may either: —Underwrite the issue – here the investment banker purchases the issue and hopes to sell it at a higher price to the public (assumes price risk). This is also known as a “firm commitment.” —Act as an agent – Also known as a “best efforts” offering, the investment banker does not purchase the securities and merely markets them to the public.  Typically only small, relatively unknown firms agree to a best efforts offering. Saunders Learning Group, LLC, Andover, KS
  • Investment Banking Functions:Distribution  The final role of the investment banker is to actually sell the securities.  Typically, the originating investment banking firm will form an underwriting group (syndicate) to spread the price risk.  Next, a selling group consisting of the underwriting group and, perhaps, other brokerage firms is formed to sell the security. Each member of the selling group is given an allocation for which it is responsible.  The selling group then allocates its share of the securities among interested customers. Saunders Learning Group, LLC, Andover, KS
  • Investment Banking Functions:Distribution (cont.) Before a new issue may actually be sold to investors, the originating underwriter must file a registration statement (Form S-1, or other Form S-x) with the Securities and Exchange Commission (SEC). This preliminary prospectus (“red herring”) contains information about the firm, the type of security being offered, and the proposed use of the proceeds. While it is being reviewed by the SEC, the preliminary prospectus is distributed to interested investors. The exact pricing, and often quantity, of the issue is determined the night before the actual offering. It is important to note that the SEC does not judge the quality of the issue and does not give investment advice. Its approval simply means that the prospectus meets all requirements concerning disclosure. For some time after the securities are sold, the investment banker will often participate in price-stabilizing trades (if the market tries to drive the price down, the IB will often step in to buy, thereby propping up the price). Saunders Learning Group, LLC, Andover, KS
  • Stock Market Indices and Averages  For more than 110 years, people have tracked the market’s daily ups and downs using various “indexes” of overall market performance  There are currently thousands of indices calculated by various information providers. Best known are: —Dow Jones & Co —Standard & Poor’s —Morgan Stanley Capital Markets (MSCI) —Lehman Brothers (bond indices)  Dow Jones alone currently publishes more than 3,000 indices Saunders Learning Group, LLC, Andover, KS
  • Stock Market Indices and Averages (cont.)  A short list of the major indices: —Dow Jones Industrial Average (DJIA) —Dow Jones Transportation Average (DJTA) —Dow Jones Utility Average (DJUA) —Standard & Poor’s 500 Index (S&P 500) —Standard & Poor’s 100 Index (S&P 100, or OEX) —Nasdaq Composite —Nasdaq 100 —Value Line Arithmetic Index —Value Line Geometric Index —Wilshire Total Market Index (formerly Wilshire 5000 index) Look for an additional seminar presentation from us on indices, at Slideshare. Saunders Learning Group, LLC, Andover, KS
  • Questions Saunders Learning Group, LLC, Andover, KS
  • Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. If you are financial planner, broker, tax preparer, insurance agent or banker and need seminar materials for client presentations, contact us to discuss topics, pricing and custom development. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at floyd@floydsaunders.com for more information. Saunders Learning Group, LLC, Andover, KS
  • Post Workshop Action Plan  Complete the Post Workshop Action Plan Saunders Learning Group, LLC, Andover, KS45
  • Reference Material Figuring Out Wall Street Consumer’s Guide To Financial Markets By Floyd Saunders Publisher: Saunders Learning Group ISBN: 978-0-9824019-0-3 available from Amazon, B&N, and http://www.figuringout wallstreet.com or www.floydsaunders.com Book summary: From bank failures to home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone understand how this latest crisis happened, who was responsible and what to do now to restore our financial systems. Written in an easy to understand manner, even the most complex financial concepts are easy to digest. This book provides help to monitor investments with a review of investment products, financial regulators and economic indicators. Learn how the stock market exchanges work and the world of investment banking, hedge funds, venture capital and private equity. Every chapter includes action plans for investing.Saunders Learning Group, LLC, Andover, KS
  • About the Author  Floyd Saunders has worked on Wall Street with both Bank of America and JPMorgan, where is was a vice president in global financial systems. He has worked across the industry in retail, commercial, and investment banking.  He has taught courses in Money and Banking and extensively for the American Institute of Banking and various colleges.  As a consultant, he developed and taught a wide range of banking and investing courses.  He authored three programs for the American Bankers Association: Banking on Mutual Funds and Annuities, Introduction to Securities Markets and Investing in Securities.Saunders Learning Group, LLC, Andover, KS