BUS110 Chapter 19 - Securities Market


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Securities Market

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  • Also available on a Transparency Acetate See Learning Goal 2: Compare the advantages and disadvantages of debt financing by issuing bonds, and identify the classes and features of bonds. See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and explain the differences between common and preferred stock. See text pages: 513-517 Debt vs. Equity Financing This slide compares the differences between debt and equity financing, something that students clearly need to understand. Important points to reinforce from this slide: The fact that bond interest must be paid when called for and full repayment made at the maturity date. Equity financing denotes ownership in the corporation. Stock dividends do not have to be paid to owners of stock. Share with the students the following example of debt and equity financing: A company intends to build a plant for a total cost of $15 million and will use the following combined steps to finance the project: Sell 1.5 million shares of common stock at $5.00 per share, for a total of $7.5 million Sell Secured Bonds for $7.5 million due in 10 years Obtain an operating line funds for $500,000 for security
  • See Learning Goal 1: Identify and explain the functions of securities markets, and discuss the role of investment bankers. See text pages: 512
  • See Learning Goal 4: Describe the various stock exchanges where securities are traded. See text pages: 519-521
  • Also available on a Transparency Acetate See Learning Goal 7: Explain the opportunities stocks offer as investments. See text pages: 527 How Stock Splits Work This slide covers how stock splits work in the investment market. An important point to note is investment value does not change immediately after the stock split. The investor has the same original dollar value as before the split. The hope for the investor is that as the demand for the stock increases, the value of the stock rises, (which will increase their total investment value since they have more shares due to the stock split. Dividend rates are also divided according to the degree of split. Most stock splits are two-for-one splits.
  • Also available on a Transparency Acetate See Learning Goal 10: Explain securities quotations listed in the financial section of the newspaper, and describe how stock market indicators like the Dow Jones Industrial Average affect the market. See text pages: 535 The Original 12 Dow Stocks This slide offers students some rather interesting information. These are the original twelve stocks Charles Dow used in first determining the Dow-Jones Industrial Averages. Students may be interested to see that the only company that’s still a current Dow stock is General Electric. The chapter gives rather extensive coverage to the Dow and the relevance of the Dow to the market. Make sure students understand that the Dow is just a bellwether of the direction the market is headed. Even if the Dow is increasing, there’s no guarantee your stock will be going up.
  • BUS110 Chapter 19 - Securities Market

    1. 1. * * Chapter Nineteen Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Using Securities Markets for Financing and Investing Opportunities
    2. 2. The BASICS of SECURITIES MARKETS * * <ul><li>Securities markets are financial marketplaces for stocks and bonds and serve two primary functions: </li></ul><ul><ul><li>Assist businesses in finding long-term funding to finance capital needs. </li></ul></ul><ul><ul><li>Provide private investors a place to buy and sell securities such as stocks and bonds. </li></ul></ul>The Function of Securities Markets LG1 19-
    3. 3. <ul><li>Equity (Stocks) </li></ul><ul><li>Preferred or Common </li></ul><ul><li>Investment never has to be repaid </li></ul><ul><li>Not legally obligated to pay dividends </li></ul><ul><li>Debt (Bonds) </li></ul><ul><li>Secured or Unsecured </li></ul><ul><li>Must be repaid on maturity date </li></ul><ul><li>Interest must be paid whenever specified </li></ul>Debt vs. Equity Financing 19-
    4. 4. LEARNING the LANGUAGE of STOCKS * * <ul><li>Stocks -- Shares of ownership in a company. </li></ul><ul><li>Stock Certificate -- Evidence of stock ownership. </li></ul><ul><li>Dividends -- Part of a firm’s profits that the firm may distribute to stockholders as either cash or additional shares. </li></ul>Learning the Language of Stocks LG3 19-
    5. 5. Capital - $ - Markets <ul><li>Primary Markets </li></ul><ul><ul><li>Initial Public Offerings (IPO's) </li></ul></ul><ul><li>Secondary Markets </li></ul>19-
    6. 6. ADVANTAGES of ISSUING STOCKS * * <ul><li>Stockholders are owners of a firm and never have to be repaid their investment. </li></ul><ul><li>There’s no legal obligation to pay dividends. </li></ul><ul><li>Issuing a stock can improve a firm’s balance sheet since stock creates no debt. </li></ul>Advantages & Disadvantages of Issuing Stock LG3 19-
    7. 7. DISADVANTAGES of ISSUING STOCKS * * <ul><li>Stockholders have the right to vote for a company’s board of directors. </li></ul><ul><li>Issuing new shares of stock can alter the control of the firm. </li></ul><ul><li>Dividends are paid from after-tax profits and are not tax deductible. </li></ul><ul><li>The need to keep stockholders happy can affect management’s decisions. </li></ul>Advantages & Disadvantages of Issuing Stock LG3 19-
    8. 8. TWO CLASSES of STOCK * * <ul><li>Common Stock -- The most basic form </li></ul><ul><ul><li>right to vote for the board of directors </li></ul></ul><ul><ul><li>share in the profits if dividends are approved. </li></ul></ul><ul><li>Preferred Stock – </li></ul><ul><ul><li>Owners given preference in payment of company dividends </li></ul></ul>Issuing Shares of Common Stock LG3 19-
    9. 9. Organized Securities Exchanges <ul><li>New York Stock Exchange (NYSE) </li></ul><ul><li>American Stock Exchange (AMEX) </li></ul><ul><li>Over-the-Counter (OTC) </li></ul><ul><li>NASDAQ </li></ul>19-
    10. 10. LEARNING the LANGUAGE of BONDS * * <ul><li>Bond -- A corporate certificate indicating that an investor has lent money to a firm. </li></ul>Learning the Language of Bonds LG4 <ul><li>The principal is the face value of the bond. </li></ul><ul><li>Interest -- The payment the bond issuer makes to the bondholders to compensate them for the use of their money. </li></ul>19-
    11. 11. ADVANTAGES of ISSUING BONDS * * <ul><li>Bondholders are creditors, not owners of the firm and can’t vote on corporate matters. </li></ul><ul><li>Bond interest is tax deductible. </li></ul><ul><li>Bonds are a temporary source of funding and are eventually repaid. </li></ul><ul><li>Bonds can be repaid before the maturity date if they contain a call provision. </li></ul>Advantages & Disadvantages of Issuing Bonds LG4 19-
    12. 12. DISADVANTAGES of ISSUING BONDS * * <ul><li>Bonds increase debt and can affect the market’s perception of the firm. </li></ul><ul><li>Paying interest on bonds is a legal obligation. </li></ul><ul><li>If interest isn’t paid, bondholders can take legal action. </li></ul><ul><li>The face value of the bond must be repaid on the maturity date. </li></ul>Advantages & Disadvantages of Issuing Bonds LG4 19-
    13. 13. DIFFERENT CLASSES of CORPORATE BONDS * * <ul><li>Corporations can issue two classes of bonds: </li></ul><ul><ul><li>Unsecured bonds (debenture bonds): not backed by specific collateral. </li></ul></ul>Different Classes of Bonds LG4 <ul><ul><li>Secured bonds : backed by collateral (land or equipment). </li></ul></ul>19-
    14. 14. FIVE INVESTMENT CRITERIA * * <ul><li>Investment risk </li></ul><ul><li>Yield </li></ul><ul><li>Duration </li></ul><ul><li>Liquidity </li></ul><ul><li>Tax consequences </li></ul>Choosing the Right Investment Strategy LG5 19-
    15. 15. KEY CONSIDERATION <ul><li>Diversification! </li></ul>
    16. 16. SELECTING STOCKS * * <ul><li>Capital Gains -- The positive difference between the price at which you bought a stock and what you sell it for. </li></ul><ul><li>Investors can also choose stocks according to their strategy: </li></ul><ul><ul><li>Blue-chip stocks </li></ul></ul><ul><ul><li>Growth stocks </li></ul></ul><ul><ul><li>Income stocks </li></ul></ul><ul><ul><li>Penny stocks </li></ul></ul>Investing in Stocks LG6 19-
    17. 17. STOCK SPLITS * * <ul><li>Stock Splits -- An action by a company that gives stockholders two or more shares of additional stock for every share that’s outstanding. </li></ul><ul><li>Splits cause no change in the firm’s ownership structure and no change in investment’s value. </li></ul><ul><li>Firms can never be forced to spilt their stocks. </li></ul>Stock Splits LG6 19-
    18. 18. How Stock Splits Work 19- 100 shares of ABC stock selling at $80 100 shares @ $40 100 shares @ $40 100 shares @ $45 100 shares @ $45 2 for 1 Stock Split Declared Lower Price increases Demand Increased demand increases price How Much Profit Has Been Made?
    19. 19. INVESTING in MUTUAL FUNDS and EXCHANGE-TRADED FUNDS * * <ul><li>Mutual Fund -- An organization the buys stocks and bonds and then sells shares in those securities to the public. The fund pools investors’ money and buys stocks according to the fund’s purpose. </li></ul><ul><li>Exchange-Traded Fund (ETF) -- Collections of stocks and bonds that are traded on securities exchanges but themselves are traded more like stocks than mutual funds. </li></ul>LG8 Investing in Mutual Funds & Exchange-Traded Funds 19-
    20. 20. Original 12 Dow Stocks (1896) <ul><li>American Cotton Oil </li></ul><ul><li>American Sugar Refining Co. </li></ul><ul><li>American Tobacco </li></ul><ul><li>Chicago Gas </li></ul><ul><li>Distilling & Cattle Feeding Co. </li></ul><ul><li>General Electric Co. </li></ul><ul><li>Laclede Gas Light Co. </li></ul><ul><li>National Lead </li></ul><ul><li>North American Co. </li></ul><ul><li>Tennessee Coal, Iron, & Railroad Co. </li></ul><ul><li>U.S. Leather </li></ul><ul><li>U.S. Rubber Co. </li></ul>19-
    21. 21. Current DJIA 30 19- DJIA 30