Chapter 18


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  • A. Stocks and bonds are commonly called securities, because both represent obligations on the part of issuers to provide purchasers with expected or stated returns on the funds invested or loaned. B. Securities are bought and sold in two markets - the primary market and the secondary market. C. Stocks, bonds, and money market instruments are short-term debt securities, and investors choose specific securities that best help them to meet their investment objectives. The Primary Market 1. In the primary market, firms and governments issue securities and sell them initially to the public. 2. Both profit-seeking corporations and government agencies also rely on primary markets to raise funds by issuing bonds.
  • Tombstones - the announcements of stock and bond offerings appear daily in business journals. The two ways in which securities are sold to the investment public are: • through investment bankers • in open auctions The IPOs of most corporate and municipal securities are sold through financial specialists called investment bankers. Underwriting - An investment banker, serving as a financial intermediary, purchases the issue from the firm or government and then resells the issue to investors.
  • Generally low-risk securities that are purchased by investors when they have surplus cash.
  • 1. By selling bonds, a firm obtains long-term debt capital. 2. issued in various denominations (face values), usually between $1,000 and $25,000 3. Because bondholders are creditors, they have a claim on the firm’s assets that must be satisfied before any claims of the stockholders in the event of the firm’s dissolution.
  • 1. One tool used by bond investors to assess the riskiness of a bond is its bond-rating, which will descend as risk increases. 2. The second factor affecting a bond is the interest rate - the higher the interest rate, the higher the price of the bond. 3. Another important influence on bond prices is the market interest rate. 4. Because bonds pay fixed rates of interest, as market interest rates rise, bond prices fall, and vice versa.
  • 1. To ease repayment problems, some borrowers will issue serial bonds, which consist of several bonds that mature on different dates. 2. A variation of the concept of serial bonds is the sinking-fund bond, under which an issuer makes annual deposits to accumulate funds for use in redeeming the bonds when they mature. 3. A call provision allows the issuer to redeem the bond prior to its maturity at a pre-specified price, and the call is generally made when market rates are declining.
  • Institutional investor 1. an organization that invests its own funds or those it holds in trust for others 2. buys and sells large quantities of securities, often in blocks of 10,000 or more shares per transaction 3. has become the most important force in today’s securities markets
  • 1. Growth in Capital - in terms of potential growth in capital over time, specifically long periods of time, common stocks are the most widely accepted. 2. Stability of Principle - Treasury bills and other money market instruments are the clear winners when it comes to stability of principle. 3. Liquidity - a measure of the speed at which assets can be converted into cash. 4. Current Income a. money market interest rates experience up and down swings in response to economic conditions b. the interest rate on a bond remains constant. c. investors who seek high current income should invest a large portion of their funds in bonds. 5. Growth in Income a. when you buy a bond, the interest rate you receive is fixed for the life of the bond. b. interest rates on money market instruments can increase over time - and decrease as well.
  • 1. is the largest, and probably most famous, stock market in the world 2. Today more than 4,000 common and preferred stock issues are traded on the NYSE, and represent most of the largest, best-known companies in the U.S. 3. Buying and selling takes place face-to-face on a trading floor, and buy and sell orders are transmitted to one of 42 posts - each stock is assigned a post - on the floor of the exchange. 4. Even though the NYSE retains a trading floor, the exchange has become highly automated in recent years. 5. Its computer systems automatically match and route most orders, which are typically filled in a few seconds.
  • Regional Exchanges originally established to trade the shares of small, regional companies, the regional exchanges now list securities of many large corporations as well.
  • Choosing a brokerage firm, and a specific stockbroker, is one of the most important decisions investors make.
  • An investor’s request to buy or sell stock at the current market price is called a market order, which instructs a brokerage firm to obtain the highest price - if the investor is selling, or the lowest price - if the investor is buying.
  • Online brokerage firms charge some of lowest fees of all brokerage firms, and give their customers access to a wide range of investment information, though they do not provide advice to investors directly.
  • 1. At least four or five pages of most daily newspapers are devoted to reporting current financial news. 2. Focuses on the previous day’s securities transactions 3. Stocks and bonds traded on the various securities markets are listed alphabetically in the newspaper. 4. Separate sections exist for each of the major markets. 5. Numerous Internet Resources
  • A. Managed by experienced investment professionals whose careers are based on success in analyzing the securities markets and choosing the right mix of securities for their funds B. Many have been developed for investors who want their religious or personal philosophies reflected in the management of the fund.
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