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  • Company: Berkshire Hathaway
  • See Learning Goal 1: Describe the role of securities markets, and of investment bankers.
  • See Learning Goal 1: Describe the role of securities markets, and of investment bankers. Facebook and Groupon are expected to have IPOs in 2011 that will raise billions for the companies.
  • See Learning Goal 1: Describe the role of securities markets, and of investment bankers. Investment bankers help companies by: (1) gaining approval from the SEC for a firm to issue stocks or bonds and (2) underwriting.
  • See Learning Goal 2: Identify the stock exchanges where securities are traded. In 2011, the NYSE Euronext agreed to be acquired by Deutsche Borse AG for about $10 billion. The trading floor is largely symbolic now as most trading is done electronically.
  • See Learning Goal 2: Identify the stock exchanges where securities are traded. Top Stock Exchanges This slide profiles the largest stock exchanges in the world. To be listed on the NYSE, the company must have at least 2200 shareholders, average daily volume of at least 100,000 shares, a market cap of $750 million, or pretax earnings of $10 million. NASDAQ is an acronym which stands for the National Association of Securities Dealers Automated Quotations. London Exchange merged with the Italian Exchange, both of which have been operating for over 200 years. Tokyo exchange operated a trading floor for 120 years. In 1999, the trading floor was closed as the Tokyo Stock Exchange went to all electronic trading similar to NASDAQ. The Deutsche Borse is located in Frankfurt, Germany.
  • See Learning Goal 2: Identify the stock exchanges where securities are traded.
  • See Learning Goal 2: Identify the stock exchanges where securities are traded. The Securities and Exchange Act also prohibits insider trading by using knowledge or information gained through a person ’s position in a firm that allows them to benefit unfairly.
  • The primary purpose of a securities exchange is to allow members of the exchange to buy or sell securities on behalf of investors. NASDAQ stands for National Association Securities Dealers Automated Quotations. This exchange is completely electronic allowing for orders to be quickly matched up via computers.
  • See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.
  • See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.
  • See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.
  • See Learning Goal 3: Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock. In the event of bankruptcy, the rights of common stock holders are subordinated to preferred stock holders.
  • Advantages of issuing stock: equity never has to be repaid, the company is under no legal obligation to pay dividends, and selling stock can improve a company’s balance sheets since it doesn’t create debt. Disadvantages: equity holders have the right to vote, dividends are not tax deductible, and the need to keep shareholders happy can affect managers decisions. Common stock holders have the right to vote, while preferred stock holders do not. Preferred stock holders have rights if the company enters bankruptcy. Preferred stock holders receive a fixed dividend, while common holders are not guaranteed to be paid a dividend.
  • See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds. Unlike dividends, interest payments are tax deductible.
  • See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
  • See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
  • See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds. The rating agencies of Moody ’s and Standard & Poor’s have been under fire for highly rating some of the investment firms that issued mortgage backed securities. For example, Lehman Brothers received positive ratings within days of its collapse.
  • See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
  • See Learning Goal 4: Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.
  • Bonds are considered debt financing, since they must be paid back when the bond matures. A 9% debenture bond due in 2025 has a coupon rate or interest rate of 9 percent and matures in 2025. A secured bond is backed by some form of collateral. While an unsecured bond or debenture is not backed or secured by any collateral. Convertible bonds are attractive, because they give bondholders the option to convert their bonds into stock. This is attractive since stocks tend to appreciate faster than bonds do.
  • See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.
  • See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.
  • See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.
  • See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation. Investing 101 Some people want to jump right into an investment. This slide shows three ways to learn about investment strategies. Ask students: Would you take an investing class or jump straight into the market? Would you know how to do the needed research?
  • See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation. Average Annual Return of Asset Classes This slide profiles average returns since 1926 for various asset classes. Although the recession since 2008 has been harsh, this chart shows that over the long-term equity is a solid investment. Ask students: Why do you think small companies have a higher rate of return than any other asset class?
  • See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation. Diversification helps spread risk by buying different types of investments.
  • See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.
  • See Learning Goal 5: Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation. Primary Investment Services Consumers Need This slide presents the needs of consumers when it comes to financial planning. Today ’ s brokers provide more than simply the buying and selling of stocks and bonds. Companies like Charles Schwab and Fidelity help individuals plan for the future.
  • The main advantage of investing through online brokers is that the fees charged tend to be lower than traditional brokers. The key disadvantage is that investors must generally do their own research and make their own investment decisions without direct assistance from their broker. The goal of diversification is to reduce the overall risk an investor assumes.
  • See Learning Goal 6: Analyze the opportunities stocks offer as investments.
  • See Learning Goal 6: Analyze the opportunities stocks offer as investments. Bear Market Declines This slide profiles the bear market declines over the past forty years. The past decade has been abysmal with two significant bear markets. Have students think about the times when bear markets have caused declines in the S&P. What was going on in the country or world at these times? What might have been the causes of these bear markets? What were the effects?
  • See Learning Goal 6: Analyze the opportunities stocks offer as investments.
  • See Learning Goal 6: Analyze the opportunities stocks offer as investments. 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 the lower price will cause the demand for the stock to increase, raising the stock price (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. Since 1975, Wal-Mart has split their shares on eight different occasions. If an individual investor purchased 100 shares in 1980 they would own 25,600 shares after adjusting for splits!
  • See Learning Goal 6: Analyze the opportunities stocks offer as investments. Investors purchasing on margin are increasing their purchasing power, so they can own more stock without fully paying for it. Students should know the risk associated with buying stocks on margin. Margin exposes investors to the following risks: You can lose more money than you invested. You may have to deposit additional cash or securities in your account on short notice to cover market losses. You may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities. Your brokerage firm may sell some or all of your securities without consulting you to pay off the loan it made to you. Know that your firm charges you interest for borrowing money which will affect the total return on your investments.
  • See Learning Goal 6: Analyze the opportunities stocks offer as investments. Stock quotations are now readily available on numerous websites.
  • See Learning Goal 6: Analyze the opportunities stocks offer as investments. Top Financial News and Research Sites Financial information is now readily available online. This slide lists some of the sites where information can be easily gathered. If time allows, encourage students to visit these web sites and evaluate their usefulness. Ask students: Which of these web sites was the best? Why would it be a good idea to consult more than one of these web sites before deciding to invest?
  • See Learning Goal 7: Analyze the opportunities bonds offer as investments. A junk bond has a rating of BB or less.
  • See Learning Goal 7: Analyze the opportunities bonds offer as investments.
  • See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).
  • See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs). What Mutual Funds Can Learn From KaChing KaChing is a web site where professional investors share everything about their portfolios. Fast Company shows how KaChing can help investors understand what they ’re getting into. The magazine uses the example of Morningstar and how most of its portfolio managers didn ’t invest in their own funds. Potential investors would like to know information like that!
  • See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs). Percentage of Households Owning Mutual Funds This slide presents the percentage of US households owning mutual funds over the past 30 years. Ask the students – Do you or your parents own mutual funds? How did they get involved in purchasing them, and what type of research do they do before buying them? Did they develop investment objectives or was it based on some tip or advice? It should be pointed out to the students that people may get into investing for the right reasons and with right intentions (retirement, savings for college, vacations, home buying, etc.). However, it is very important to maintain discipline. Many people, if not most, deviate from these investment objectives and start to invest based on the so-called “hot tip.” Mutual funds should be treated as investments which you commit to based on researched information and not hot tip or quick hit gambling.
  • See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs). Varieties of ETFs This slide lists three varieties of ETFs that are available. ETFs have numerous benefits when compared to mutual funds. If time permits, have students prepare a list of and/or discuss the advantages of ETFs. (Transparent pricing, lower fees, and returns at least equal to the index that the ETF tracks, are just some of the advantages students might discuss.) Traditional ETFs include: SPY which tracks the S&P 500 and TIP which tracks inflation protected government bonds. Niche ETFs include: IXJ which tracks the S&P Global Healthcare Sector. Exotic ETFs include: FXA which tracks the Australian Dollar and GLD which tracks the price of gold.
  • See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs). The price per share for a mutual fund is referred to as the net asset value or NAV.
  • See Learning Goal 8: Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs). This slide is based on Figure 19.8.
  • When a company splits its stock 2 for 1 the shareholders receive two shares of stock for each share they own. The current share price is cut in half, so the number of shares increases, the total value of the investment remains the same. The board may decide to split a company’s stock 2 for 1, 3 for 2 or any other ratio they determine is appropriate. The reason that a company splits its stock is to reduce the price of the stock which will hopefully increase the demand for the stock. When an investor buys on margin, they use money borrowed from their broker to purchase stock. A mutual fund is an investment fund that buys stocks and bonds then sells shares in those securities to the public. The pooling of funds allows small investors to invest in a broader selection of stocks and bonds. Most mutual funds are professionally managed. ETFs are similar to mutual funds, but are traded on exchanges like individual stocks and are passively managed. The key benefit to investing in a mutual fund or ETF is that the investor gets instant diversification.
  • See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market. The Dow Jones Industrial Average is the oldest index which was originally created in 1896 by Charles Dow and Edward Jones. The original average had twelve companies, one of which, GE, is still in the Dow Jones Industrial average after all these years.
  • See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market.
  • See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market.
  • See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market. The Wall Street of Now Since the economic crisis hit, Wall Street has taken many cuts. This slide shows how Bloomberg Businessweek sees the new way for Manhattan bankers to unwind.
  • See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market. The downturn of 1987 prompted the U.S. exchanges to create mechanisms called curbs and circuit breakers to restrict program trading whenever the market moves up or down by a large number of points in a trading day. A key computer is turned off and program trading is halted. If you watch programming on CNBC or MSNBC, you’ll see the phrase “curbs in” appear on the screen.
  • See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market. Who ’s at Fault for the Economic Crisis? This slide reviews some of the players in the economic crisis. Like all complex problems, this crisis was not caused by one group. You could actually include another culprit (not listed on this slide): worldwide saving surplus. Gulf States, China, Japan and Brazil all reinvested export earnings in US dominated assets, primarily government bonds. This had the effect of keeping interest low, thus allowing consumers and the United States Government (as well as many state and local governments) to spend beyond their means, racking up massive consumer and federal debt. To discuss the crisis ask students: Who ’s at fault for the economic crisis? ( When discussing this highly charged topic it is important to make sure students understand that the fault lies not just with Wall Street and Washington, but with consumers including themselves. )
  • See Learning Goal 9: Describe how indicators like the Dow Jones Industrial Average affect the market. Dodd-Frank represents the most sweeping change in financial regulation since the Great Depression. Although it ’s not perfect, the Dodd-Frank Act at least resolves some of the most pressing issues facing our economy today, while setting the stage for a stronger financial future.
  • The Dow Jones Industrial Average is the average price of 30 specific industrial stocks. It is important because it allows followers of the market to track the general direction of the stock market. The Dow will delete and add new companies to the Dow Jones Industrial Average to reflect increased economic importance of a particular company or industry. Recently, Cisco and Travelers replaced Citi and GM. Program trading occurs when investors give instructions to their computers to execute a sell order if the stock price dips to a certain point. Many attribute the stock market crash of 1987 to program trading as computer sell orders caused many stocks to fall to incredible levels.

Chap019 Chap019 Presentation Transcript

  • Chapter 19 Using Securities Markets for Financing and Investing OpportunitiesMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
  • ChapterNineteen LEARNING GOALS 1. Describe the role of securities markets and of investment bankers. 2. Identify the stock exchanges where securities are traded. 3. Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock. 4. Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds. 19-2
  • ChapterNineteen LEARNING GOALS 5. Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation. 6. Analyze the opportunities stocks offer as investments. 7. Analyze the opportunities bonds offer as investments. 8. Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs). 9. Describe how indicators like the Dow Jones Industrial Average affect the market. 19-3
  • Profile MARIA BARTIROMO CNBC • Emmy Award-winning journalist, Bartiromo’s analysis of day-to-day Wall Street has made her the face of investing. • Started as an overnight producer for CNN before moving to CNBC. • She’s lead anchor at two of CNBC’s biggest shows, has written several books and numerous columns. 19-4
  • ChapterNineteen NAME that COMPANY When the price of their stock rises to a certain level, many companies will split the stock in order to make the stock appear more affordable. However, this company run by America’s most successful investor has never split its stock even when the price of the company’s stock reached $150,000 a share (that’s right $150,000 for one share.) Name that company! 19-5
  • The Functionof SecuritiesMarkets The BASICS of LG1 SECURITIES MARKETS • Securities markets are financial marketplaces for stocks and bonds and serve two primary functions: 1. Assist businesses in finding long-term funding to finance capital needs. 2. Provide private investors a place to buy and sell securities such as stocks and bonds. 19-6
  • The Functionof SecuritiesMarkets TYPES of LG1 SECURITIES MARKETS • Securities markets are divided into primary and secondary markets: - Primary markets handle the sale of new securities. - Secondary markets handle the trading of securities between investors with the proceeds of the sale going to the seller. • Initial Public Offering (IPO) -- The first offering of a corporation’s stock. 19-7
  • The Role ofInvestmentBankers INVESTMENT BANKERS LG1 and INSTITUTIONAL INVESTORS • Investment Bankers -- Specialists who assist in the issue and sale of new securities. • Institutional Investors -- Large organizations such as pension funds or mutual funds that invest their own funds or the funds of others. 19-8
  • StockExchanges STOCK EXCHANGES LG2 • Stock Exchange -- An organization whose members can buy and sell (exchange) securities on behalf of companies and individual investors. • Over-the-Counter (OTC) Market -- Provides companies and investors with a means to trade stocks not listed on the national securities exchanges. • NASDAQ -- A telecommunications network that links dealers across the nation so they can exchange securities electronically. 19-9
  • StockExchanges TOP STOCK EXCHANGES LG2 • NYSE Euronext • NASDAQ • London Stock Exchange • Tokyo Stock Exchange • Deutsche Borse 19-10
  • A PLACE for SMALL COMPANIES to CALL HOME (Spotlight on Small Business)• Since the recent financial crisis, small businesses have found it difficult to secure financing from banks.• David Weild wants a new stock exchange where small companies can raise needed capital.• Though this is a new idea in the U.S., China established ChiNext which is designed for start- up companies. 19-11
  • SecuritiesRegulationsand the SEC The SECURITIES and LG2 EXCHANGE COMMISSION • Securities and Exchange Commission (SEC) -- The federal agency responsible for regulating the various stock exchanges; created in 1934 through the Securities and Exchange Act. • Prospectus -- A condensed version of economic and financial information that a company must file with the SEC before issuing stock; the prospectus must be sent to prospective investors. 19-12
  • ProgressAssessment PROGRESS ASSESSMENT • What’s the primary purpose of a securities exchange? • What does NASDAQ stand for? How does this exchange work? 19-13
  • How BusinessesRaise Capital bySelling Stock LEARNING the LG3 LANGUAGE of STOCKS • Stocks -- Shares of ownership in a company. • Stock Certificate -- Evidence of stock ownership. • Dividends -- Part of a firm’s profits that the firm may distribute to stockholders as either cash or additional shares. 19-14
  • Advantages &Disadvantagesof Issuing Stock ADVANTAGES of LG3 ISSUING STOCK • Stockholders are owners of a firm and never have to be repaid their investment. • There’s no legal obligation to pay dividends. • Issuing stock can improve a firm’s balance sheet since stock creates no debt. 19-15
  • Advantages &Disadvantagesof Issuing Stock DISADVANTAGES of LG3 ISSUING STOCK • Stockholders have the right to vote for a company’s board of directors. • Issuing new shares of stock can alter the control of the firm. • Dividends are paid from after-tax profits and are not tax deductible. • The need to keep stockholders happy can affect management’s decisions. 19-16
  • Issuing Sharesof Common andPreferred Stock TWO CLASSES of STOCK LG3 • Common Stock -- The most basic form; holders have the right to vote for the board of directors and share in the profits if dividends are approved. • Preferred Stock -- Owners are given preference in the payment of company dividends before common stock dividends are distributed. Preferred stock can also be: - Callable - Convertible - Cumulative 19-17
  • ProgressAssessment PROGRESS ASSESSMENT • Name at least two advantages and disadvantages of a company’s issuing stock as a form of equity financing. • What are the major differences between common stock and preferred stock? 19-18
  • Learning theLanguage ofBonds LEARNING the LG4 LANGUAGE of BONDS • Bond -- A corporate certificate indicating that an investor has lent money to a firm (or a government). • The principal is the face value of the bond. • Interest -- The payment the bond issuer makes to the bondholders to compensate them for the use of their money. 19-19
  • Advantages &Disadvantagesof Issuing Bonds ADVANTAGES of LG4 ISSUING BONDS • Bondholders are creditors, not owners of the firm and can’t vote on corporate matters. • Bond interest is tax deductible. • Bonds are a temporary source of funding and are eventually repaid. • Bonds can be repaid before the maturity date if they contain a call provision. 19-20
  • Advantages &Disadvantagesof Issuing Bonds DISADVANTAGES of LG4 ISSUING BONDS • Bonds increase debt and can affect the market’s perception of the firm. • Paying interest on bonds is a legal obligation. • If interest isn’t paid, bondholders can take legal action. • The face value of the bond must be repaid on the maturity date. 19-21
  • Advantages &Disadvantagesof Issuing Bonds BOND RATINGS LG4 Rating Moody’s S &P Fitch Description Aaa AAA AAA Highest Quality Aa AA AA High Quality A A A Upper-Medium Grade Baa BBB BBB Medium Grade Ba BB BB Lower-Medium Grade B B B Speculative Caa CCC, CC CCC Poor Ca C DDD Highly Speculative C D D Lowest Grade 19-22
  • DifferentClasses ofBonds DIFFERENT CLASSES of LG4 CORPORATE BONDS • Corporations can issue two classes of bonds: 1. Unsecured bonds (debenture bonds): not backed by specific collateral. 2. Secured bonds: backed by collateral (land or equipment). 19-23
  • Special BondFeatures SPECIAL FEATURES in LG4 BOND ISSUES • Sinking Fund -- Reserve account set up to ensure that enough money will be available to repay bondholders on the maturity date. • Callable bonds permit bond issuers to pay off the principal before the maturity date. • Convertible bonds allow bondholders to convert their bonds into shares of common stock. 19-24
  • ProgressAssessment PROGRESS ASSESSMENT • Why are bonds considered a form of debt financing? • What does it mean if a firm issues a 9% debenture bond due in 2025? • Explain the difference between an unsecured and secured bond. • Why are convertible bonds attractive to investors? 19-25
  • HowInvestors BuySecurities BUYING SECURITIES LG5 • Stockbroker -- A registered representative who works as a market intermediary to buy and sell securities for clients. • Online trading services, such as TD Ameritrade, E*Trade, and Scottrade, offer securities trading services online to buy and sell stocks and bonds. 19-26
  • MONEY GOING UP in SMOKE (Making Ethical Decisions)• You recently received news that your Uncle Alex passed away after a long battle with lung cancer caused by smoking. He left you $25,000 in his will, saying you were his favorite nephew.• Your friend Jack recommends that you buy stock in a well-known multinational firm that’s primary product is tobacco.• Will you invest your inheritance in a company that markets tobacco? 19-27
  • Choosing theRightInvestment FIVE INVESTMENT CRITERIAStrategy LG5 1. Investment risk 2. Yield 3. Duration 4. Liquidity 5. Tax consequences 19-28
  • Choosing theRightInvestment INVESTING 101Strategy Things to Do Before Making Your First Investment LG5 • Take an investing class. • Attend a conference. • Head to the library and pick up these books: - The Big Short - The Intelligent Investor - The Myth of the Rational Market Source: Money, November 2010. 19-29
  • Choosing theRightInvestment AVERAGE ANNUAL RETURN ofStrategy LG5 ASSET CLASSES (Since 1926) Source: Ibbotson Associates and Morningstar. 19-30
  • Reducing Riskby DiversifyingInvestments DIVERSIFICATION LG5 • Diversification -- Buying several different types of investments to spread the risk of investing. • If diversifying, an investor may put: - 25% of his/her money into U.S. growth stocks - 25% in government bonds - 25% in dividend-paying stocks - 10% in an international mutual fund - The rest in a savings account 19-31
  • The SUN NEVER SETS on STOCK OPPORTUNITIES (Reaching Beyond Our Borders)• Suggestions for building your financial future: - Invest in global companies you know and that have solid performance records. - Invest in global stocks listed on U.S. exchanges. - Contact U.S. brokers about American Depository Receipts (ADRs). - Invest in global mutual funds that focus on specific countries or regions. - Use extreme caution if investing in unstable countries! 19-32
  • Reducing Risk PRIMARY INVESTMENT SERVICESby DiversifyingInvestments LG5 CONSUMERS NEED • Savings and investing advice • Help with 401k plans • Retirement planning • Tax planning • Estate planning • Education expense planning Source: Investment Company Institute. 19-33
  • ProgressAssessment PROGRESS ASSESSMENT • What is the key advantage of investing through online brokers? What is the key disadvantage? • What is the primary purpose of diversifying investments? 19-34
  • Investing inStocks PERCEPTIONS of the MARKET LG6 • Bulls: Investors who believe stock prices are going to rise. • Bears: Investors who expect stock prices to decline. 19-35
  • Investing inStocks BEAR MARKET DECLINES LG6 in the S&P 500 Source: Stock Traders Almanac 2011. 19-36
  • Investing inStocks SELECTING STOCKS LG6 • Capital Gains -- The positive difference between the price at which you bought a stock and what you sell it for. • Investors can also choose stocks according to their strategy: - Blue-chip stocks - Growth stocks - Income stocks - Penny stocks 19-37
  • Stock Splits STOCK SPLITS LG6 • Stock Splits -- An action by a company that gives stockholders two or more shares of additional stock for every share that they own. • Splits cause no change in the firm’s ownership structure and no change in the investment’s value. • Firms can never be forced to spilt their stocks. 19-38
  • Buying Stockon Margin BUYING STOCK on MARGIN LG6 • Buying Stock on Margin -- Borrowing some of the stock’s purchase cost from the brokerage firm. • M a r g i n i s 19-39
  • UnderstandingStockQuotations UNDERSTANDING STOCK LG6 QUOTATIONS 19-40
  • UnderstandingStock TOP FINANICIAL NEWS andQuotations LG6 RESEARCH SITES • Yahoo Finance • DailyFinance • MSN Money • Forbes • Dow Jones & Co. 19-41
  • Investing inBonds IMPORTANT BOND QUESTIONS LG7 • First-time bond investors generally ask two questions: - Do you have to hold a bond until the maturity date? - How can I assess the investment risk of a particular bond issue? • Junk Bonds -- Bonds that are high-risk and have high default rates. 19-42
  • UnderstandingBondQuotations UNDERSTANDING BOND LG7 QUOTATIONS 19-43
  • Investing inMutual Funds &Exchange- INVESTING in MUTUAL FUNDSTraded Funds LG8 and EXCHANGE-TRADED FUNDS • 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. • Exchange-Traded Fund (ETF) -- Collections of stocks and bonds that are traded on securities exchanges, but are traded more like individual stocks than mutual funds. 19-44
  • Investing inMutual Funds &Exchange- WHAT MUTUAL FUNDS CANTraded Funds LG8 LEARN FROM KaChing 1. Reform the ratings system 2. Give information for free 3. Cut out useless fees 4. Be transparent 5. Share insights Source: Fast Company, March 2010. 19-45
  • Investing inMutual Funds &Exchange- PERCENTAGE of HOUSEHOLDSTraded Funds LG8 OWNING MUTUAL FUNDS Source: Investment Company Institute Factbook. 19-46
  • Investing inMutual Funds &Exchange-Traded Funds VARIETIES of ETFs LG8 Source: Schwab and E*Trade. 19-47
  • UnderstandingMutual FundQuotations UNDERSTANDING LG8 MUTUAL FUND QUOTATIONS 19-48
  • UnderstandingMutual FundQuotations COMPARING INVESTMENTS LG8 19-49
  • ProgressAssessment PROGRESS ASSESSMENT • What is a stock split? Why do companies sometimes split their stock? • What does buying stock on margin mean? • What are mutual funds and ETFs? • What is the key benefit to investors in investing in a mutual fund or ETF? 19-50
  • UnderstandingStock MarketIndicators KEY STOCK MARKET LG9 INDICATORS •Dow Jones Industrial Average -- The average •Critics say the 30-company Dow is too small a •S&P 500 tracks the performance of 400 industrial, 19-51
  • Riding theMarket’s RollerCoaster MARKET TURMOIL LG9 • The stock market has its shares of ups and downs: - October 29, 1929 - Black Tuesday; the market lost 13% of its value. - October 19, 1987 - The market suffered its worst one- day drop when it lost 22% of its value. - October 27, 1997 - Fears of an economic crisis in Asia cause widespread panic and 19-52 losses.
  • Riding theMarket’s RollerCoaster TURMOIL in the 2000s LG9 • The market collapsed into a deep decline in 2000-2002 when the dot-com bubble burst. - Investors lost $7 trillion in market value. • Starting in 2008, the collapse of the real estate market sent financial markets into panic. - The U.S. government made significant investments in private banks and offered a large stimulus package to re- energize the economy. 19-53
  • Riding theMarket’s RollerCoaster The WALL STREET of NOW LG9 Source: Bloomberg Businessweek, September 6, 2010. 19-54
  • Riding theMarket’s RollerCoaster The UPS and DOWNS LG9 of the MARKET • Program Trading -- Giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses. • Analysts believe program trading caused the turmoil in 1987. • The exchanges created mechanisms to restrict program trading. 19-55
  • Riding theMarket’s RollerCoaster WHO’S at FAULT for the LG9 ECONOMIC CRISIS? • Wall Street - Issued exotic securities; paid excessive compensation based on bonuses; and investment banks got the SEC to relax capital requirements. • Main Street - Americans lived beyond their means; lenders gave favorable loans to homebuilders; greedy homeowners took out equity loans; and teaser mortgage rates let people live large. • Washington - Gramm-Leach-Billey Act allowed commercial and investment banks to partner; housing interest rates were kept low; and Community Reinvestment Act forced lending to people with bad credit. Source: Fortune Magazine, www.fortune.com, accessed July 2011. 19-56
  • CLEANING UP the STREET (Legal Briefcase)• Congress passed the Dodd-Frank Financial Reform and Consumer Protection Act into law on July 21, 2010.• Gives the government power to seize and shutter large financial institutions on the verge of collapse in an effort to prevent further bailouts.• Formed an independent consumer protection agency housed within the Federal Reserve, protecting borrowers against a host of financial abuses ranging from payday loans to mortgages and credit cards. 19-57
  • ProgressAssessment PROGRESS ASSESSMENT • What does the Dow Jones Industrial Average measure? Why is it important? • Why do the 30 companies comprising the Dow change periodically? • Explain program trading and the problems it can create. 19-58